Filing for bankruptcy protection while trying to do a mortgage modification poses realistic, technical and legal problems. Whenever possible, complete the mortgage modification before you file for bankruptcy. Dividing your time and energy to both goals can overwhelm you. The legal issues are the biggest hurdle, as bankruptcy judges are not allowed to order mortgage modifications in which your lender changes the terms; for example, reducing interest rate or the loan balance of your mortgage loan to help you stay or get up-to-date.
Try to convince your mortgage lender to modify your loan terms before you file for bankruptcy to avoid more complex and confusing legal issues. Understand that mortgage lenders do not want to modify mortgages, only doing so when it ultimately benefits their situation. Many mortgage loan notes prohibit modifications while the borrower is in the bankruptcy process or has her bankruptcy discharged successfully. Until bankruptcy judges are allowed to approve modifying mortgage loans after the bankruptcy has begun, avoid trying to do both at the same time.
Chapter 13 Bankruptcy
Unlike Chapter 7 bankruptcy, which typically is resolved in three to six months, Chapter 13 bankruptcies, often called the wage earner plans, can last for years. With Chapter 13 bankruptcies, you consolidate and modify other debts. You can, therefore, ask your mortgage lender to modify your loan. Mortgage loan terms, while not part of a legal Chapter 13 reorganization plan, can be changed to make monthly payments more affordable when you or your attorney negotiate directly with the lender.
Bankruptcy is a rather unusual law. It is a federal law, covering the entire U.S. However, it permits individual states to change some provisions if they so desire. Become familiar with your state's specific provisions. Always hire an attorney experienced with both federal bankruptcy law and your state's sometimes quirky regulations. In some jurisdictions, your attorney may be allowed to ask the bankruptcy court to permit you to attempt a mortgage modification if you are keeping your mortgage loan out of the bankruptcy.
Keep your mortgage out of your bankruptcy if you want to keep your home and try to get your lender to modify your mortgage loan terms. Since the bankruptcy court cannot order or influence a mortgage modification, if you hope to have the court wipe away your home loan, you cannot try to modify the debt at the same time. However, if you hope to keep your home, you can reaffirm this debt, pledging to continue paying the lender. Since the mortgage is not included in your debts to be discharged, you can continue to try to get a mortgage modification, even while enmeshed in the bankruptcy process.
Bankruptcy Court Approval
Be aware that the language in your mortgage loan note and/or your state's laws may require that you get bankruptcy court approval to accept a mortgage modification approved by your lender. This requirement exists because lowering your mortgage payment changes your financial information, which you previously filed with the bankruptcy court when you began the process. Since your income and/or debt position is different, the court may be required to formerly approve the change. Your attorney should advise you as to this requirement or lack thereof in your jurisdiction.