debt

Second bankruptcy may spare home, spouse

Justin HarelikQuestionDear Bankruptcy Adviser,
I'm married, and I filed a single Chapter 7 bankruptcy, which was discharged last October, eliminating my debts. But my wife and I face a mortgage-related question. We're in a trial loan modification program. If denied a permanent modification, we will owe the lender approximately $10,000. That's because we have been making a reduced payment during the trial modification.

Since I have a discharged Chapter 7, can my spouse file a Chapter 7 or a Chapter 13 bankruptcy, which might eliminate our debt or allow us to develop a court-approved payment plan? I'm not sure if we'd be able to file a joint Chapter 13 because of my Chapter 7 filing.
-- Mike

AnswerDear Mike,
This is an excellent question, and it's an increasingly common scenario. In most cases, the borrower is much more than $10,000 behind at the time he or she receives the loan modification rejection letter. Fortunately, you are not too far behind and should be able to file the Chapter 13 bankruptcy on your own, without your wife, in order to save the house.

I would definitely advise you to speak with a bankruptcy attorney prior to making the final decision. There are a lot of nuances unique to your situation -- whether you should file on your own, what your payment would be in the Chapter 13 and whether you have other liabilities that must be paid in any Chapter 13 bankruptcy.

A Chapter 13 bankruptcy is a repayment of your debt over three to five years. In your case, you would only repay the delinquent mortgage balance plus delinquent federal or state income taxes, delinquent property taxes and delinquent child or spousal support payments, if you happen to be liable for any of these.

Your situation is not uncommon for loan modification applicants. The borrower starts having trouble making his or her mortgage payments and contacts the lender. The lender places the borrower into a trial loan modification program, but with no guarantee of a final approval. The mortgage payment typically is reduced during the modification period, but the original loan terms and conditions remain unchanged.

You are correct to assume that you are falling further and further behind, only to be unable to bring the loan current if the lender denies your modification request. For example, suppose your mortgage payment normally is $2,200 per month, but is reduced to $1,200 during the loan modification trial. In six months, you would be $6,000 delinquent on your mortgage since you are paying $1,000 less than you are obligated to pay. Plus, you may be responsible for late fees and other miscellaneous charges.

In your case, you filed a Chapter 7. Therefore, you likely eliminated all of your unsecured debt, although you may have some lingering Internal Revenue Service or state tax liability.

Fortunately, a Chapter 13 bankruptcy is an option. One issue is that you would not be eligible to receive a discharge of your debts in the new Chapter 13 bankruptcy. A discharge is the legal process that says your debts have been eliminated. But since you received a discharge in the Chapter 7, you are now only trying to pay back your delinquent mortgage payments. Therefore, you may not need to discharge any debts. The debts that were eliminated in the Chapter 7 are not revived when you file the Chapter 13 bankruptcy.

While an approved loan modification would be better, you definitely have this other option. Depending on your income and mortgage payment, paying back $10,000 over the next three to five years inside a Chapter 13 bankruptcy may not be too difficult to manage. However, you asked for a loan modification because you were struggling, so paying anything more per month may be impossible.

Based on the facts you state above, I don’t see any reason for your wife to file bankruptcy. You might be able to protect her credit while saving the house under your own bankruptcy filing.

I cannot say for sure whether you ought to call the lender and inform them of your pending strategy. To be frank, I don't think the lender would care. If the lender rejects your loan modification application, the lender will get paid the contractually agreed-upon mortgage payment plus the delinquent payments while you are inside the Chapter 13. And if the loan modification is approved, the lender will bring the loan current via the modification and receive a modified monthly payment.

Your plan could work. It's one that I hope you are not required to undertake, but definitely an available option to you.

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