Modify home loan before filing bankruptcy

Dear Bankruptcy Adviser,
I am in the process of a loan modification on my home with my lender and will eventually need to file for bankruptcy. I have picked up a ton of debt trying to save my house. How do I know that the loan modification will be OK after I file? I don’t want to get a loan modification approved and then have it canceled after I file for bankruptcy. Thanks for your help.
— Max

Dear Max,
You are correct to be concerned. This is definitely a common problem for many people that are trying to modify their home loan and cannot afford to pay their credit card bills. People will do almost anything to keep their home and that usually includes using credit cards to pay the mortgage and other bills. The end result is a lot of credit card debt along with a delinquent mortgage.

While I personally don’t handle loan modifications, I do file 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 or if the modification is only a temporary, trial-period modification and has not been finalized.

The lender has one of two ways to confirm that a modification is final and in effect:

  • It can file a notification with the county recorder’s office that the mortgage loan has been modified.
  • It can give verbal confirmation to the servicer (the company that processes your payments, paperwork or phone calls) that the modification is final.

Unfortunately, you may be at the mercy of a final modification, verbal confirmation. This type of verbal commitment might not give you a ton of confidence, but you might not have any other options.

Lenders offer many types of modification services, and not all are firm. These agreements do not become firm until the lender or servicer says so. Here are two options:

  1. A lender can offer a forbearance agreement that requires the homeowner to make two to six months’ worth of consistent “good faith” payments to re-establish a positive repayment history. Sometimes these agreements end with a large balloon payment at the end of the forbearance period. The forbearance agreement can lead to a final modification, but the payment you are making could change.
  1. The trial repayment plan, also known as the Obama Plan or the Making Home Affordable program, requires you to make three consecutive payments before approval. As long as your financial information has not changed in that three-month period, then you will be granted final approval. Your payment will be 31 percent of your gross income and will include property tax and insurance.

Important note: If you fail to comply with the trial period provisions, then you will likely never, ever be offered another loan modification.

Do what you can to get a written commitment prior to filing, but do not be disheartened if you can only get a verbal one and the modification becomes null and void after you file for bankruptcy. You were approved once, so the lender is likely to approve you again while you are inside or completed with the bankruptcy. Be sure to continue to make monthly payments. If the lender rejects your payments when it gets notification of your bankruptcy, then you must hold those payments in a savings account to pay the lender once you begin the modification process again.

I have said this many times: Patience is a virtue, but persistence to the point of success is a blessing. You can likely save your home, but that might require a lot of work and even more patience. I hope you can keep a level head throughout the whole process.

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