Bankruptcy filing can hinder refinancing

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Dear Bankruptcy Adviser,
I filed for bankruptcy and want to refinance my mortgage from an (adjustable rate mortgage) to a 30-year fixed. I want to lower my interest rate and lower my payment.  My mortgage company says they can’t do anything while I’m in bankruptcy. How do I get a plan rate reduction or get a lower payment? I’ve asked them to modify my loan and they say they can’t. Can a loan be modified once it is in bankruptcy?
— Karen

Dear Karen,
The short answer to your question is yes; you can modify a loan once included inside your bankruptcy filing. Unfortunately, it is a long process and can be very difficult, if not impossible, to achieve until your bankruptcy is over and closed.

All finance companies handle accounts in bankruptcy differently. Some will not work with you until your case is closed. Some will work with you as long as you get court or attorney approval. Some will work with you once the property is outside of bankruptcy protection.

The problem is that when you file for bankruptcy, all actions against you — lawsuits, garnishments or levies and foreclosures must stop. These actions have been “stayed” by the bankruptcy filing which means that all pre-filing actions must stop. This is called the “automatic stay” which is created inside the bankruptcy proceedings and protects debtors and their property from creditor actions.

Once inside bankruptcy, the lender cannot attempt to collect a pre-filing debt from you. This does not mean that the balance owned on your mortgage is gone, and you get to keep the house. That is wishful thinking. You can keep your house as long as you continue making payments on the mortgage, but some lenders will back off, not wanting to risk violating the bankruptcy stay by working with you. Many lenders stop sending mortgage statements altogether. This is likely the position your lender has taken.

After filing, the lender must get judicial approval to continue with any pre-filing actions, like a foreclosure. This is called getting “relief from the automatic stay.” Typically, this process takes about two months from the date that you filed for bankruptcy protection and means that the judge has lifted the stay imposed when you filed.  Do not panic if you receive a relief-from-stay motion from your lender. The lender might open up communications with you once the court approves the lender’s motion.

In your case, you might have to wait. If a foreclosure had begun then you might have a problem trying to stop the sale while inside the bankruptcy. In some cases, when you file a bankruptcy in order to stop a pending and imminent sale — like the day before the sale could proceed immediately after the relief-from-stay motion is approved. If the foreclosure process had not begun at the time you filed then you should have time to work with the lender after your case is closed.

While I don’t have any specific numbers, I am seeing more and more that lenders are finally starting to work with homeowners.