debt

Bankruptcy may nix home loan modification

Justin HarelikQuestionDear Bankruptcy Adviser,
This question pertains to how bankruptcy affects home loan modifications. Let's say you participate in a mortgage modification program. Later, you file for bankruptcy. Is it true that you have to pay the original mortgage amount instead of the loan modification amount?
-- Carol

AnswerDear Carol,
This question has many layers. But in general, you will make the modified payment after filing. You are probably asking this question because someone you know filed bankruptcy after applying for a loan modification, only to find out that his or her mortgage payment converted back to the original loan terms after filing.

Everything depends on whether you have a final loan modification or whether you are still inside a trial modification payment plan prior to filing bankruptcy. While I personally don't handle loan modifications, I do file bankruptcy cases for clients after a modification approval.

You need to be very careful that a loan modification is approved and finalized prior to filing bankruptcy. The modification could be null and void if you file bankruptcy too soon, because you are only in a temporary, trial-period modification that has not been finalized.

Fortunately, most lenders are no longer canceling loan modification applications when a person files bankruptcy. That means you could file your bankruptcy and continue working with the lender on a modification. Be sure to ask the lender whether filing bankruptcy will disrupt your mortgage modification application. And don't take the first answer you get as the final answer. Call back and reconfirm any given information.

The lenders have one of three ways to confirm that a modification is final and in effect: file a notification with the county recorder's office that the mortgage loan is modified; provide verbal confirmation from the servicer (the company that processes your payments, paperwork or phone calls); or provide a final loan modification agreement signed by a representative for the lender.

Let's say you are contemplating bankruptcy as a way to save your home. Maybe you have outstanding debts, in addition to your mortgage, which you cannot continue to pay. The majority of individuals file one of two types of bankruptcy -- Chapter 7 or Chapter 13.

Chapter 7 bankruptcy is also known as a "fresh start" bankruptcy. It allows you to wipe out some or most of your debt while keeping most or all of your assets, like a home. If you do confirm you have a finalized loan modification and you file Chapter 7 bankruptcy, you will continue to pay the modified payment before, during and after you file. That is why you must confirm that the loan modification is final.

A Chapter 13 bankruptcy is known as a "reorganization" bankruptcy. There are three scenarios where a mortgage modification and a Chapter 13 bankruptcy could affect one another.

The first scenario is if you are current on the loan modification payments prior to filing the Chapter 13. If you still need to file bankruptcy, you might need to file Chapter 13 because your income is too high to qualify for a Chapter 7, or you are trying to save another valuable asset. There are many reasons why a person might file Chapter 13 bankruptcy even after receiving a loan modification.

A second scenario would be where you had a final modification but fell behind on your payments afterward. The terms of the modification would still be in place. You would need to file a Chapter 13 bankruptcy to catch up on the delinquent mortgage payments, but according to the terms of the modification agreement. The bankruptcy filing would not cancel the modification, nor would it reinstate the original loan terms.

Third, you file bankruptcy prior to a finalized loan modification. This happens because you could have a pending sale date on your home even while inside a modification, or perhaps you have been sued by a creditor before getting final loan modification approval. The loan modification application will either be canceled, or you might be able to continue with the application even after filing the bankruptcy. In this case, the original loan terms would rule.

So long as you confirm you have a final loan modification prior to filing bankruptcy, you can keep the terms of the new modified loan and wipe out other debts that may be burdening you. You just need to inquire with the lender prior to filing the bankruptcy paperwork. Always call the lender at least twice to confirm any information you are given.

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