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Filing Bankruptcy After a Mortgage Modification:  What You Need to Know

  • Blog
  • Jill
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  • November 20, 2018

Filing Bankruptcy After a Mortgage Modification:  What You Need to Know

Like most people, your home mortgage is your primary source of debt.  When a financial crisis occurs, you may face choosing between making the mortgage payment or buying groceries for your family.  After a few months of failure to make payments, you’re in danger of foreclosure. It doesn’t have to end this way, though. Homeowners have some options such as mortgage modification plans, repayment plans, or payment deferral plans.  

Let’s take a look at mortgage modification and bankruptcy and this can be part of an effective strategy for retaining ownership of the home.  A loan modification plan can be followed up by a Chapter 7 or 13 bankruptcy to ensure the homeowner’s burden of debt is effectively minimized. Here’s how it works.

Mortgage Modification and Bankruptcy:  Is it a Good Idea to Do Both?

One of the reasons for filing bankruptcy after a mortgage modification is that it can eliminate the second mortgage.  Yes, it’s possible that your bankruptcy attorney can negotiate an agreement with the second mortgage holder. This can include any loans that show the home as secured property or collateral on the loan.

Initiating bankruptcy after the mortgage modification will benefit homeowners by stopping foreclosure or any other collection actions.  Much or all of a person’s debt can be eliminated through Chapter 7 or Chapter 13. When a person files a bankruptcy case, the loan modification is not considered part of the “ordinary course of business.” This includes buying groceries, paying utility bills, etc.   As such, the court may not have to approve the modification, depending on whether the debtor is filing a Chapter 7 or 13.

Other Benefits of Filing Bankruptcy After a Mortgage Modification

Filing bankruptcy after a loan modification can have many benefits for a homeowner in addition to those mentioned above.  These are a few more reasons why this might be a good idea:

  • Lower house payments – Second mortgages can often be reclassified as an unsecured loan.  Smaller payments are negotiated.  In many cases, a Chapter 13 bankruptcy can relieve the debtor from having to pay the second mortgage.
  • Mortgage terms cannot be changed by the bank –  The mortgage modification prevents banks from arbitrarily changing the terms of the agreement.  If the homeowner files for Chapter 13, the bank is assured they will get their money.
  • Your liability for other debts is reduced – Bankruptcy codes and courts acknowledge a person’s need to maintain a homestead and shelter.  For this reason, medical bills, credit cards, and taxes are given low priority during bankruptcy.  
  • Your credit is already affected – If you completed a loan modification, your credit has already been negatively impacted.  So, filing for bankruptcy won’t change that situation. In both cases, a person’s credit is affected for seven to ten years.  It’s a moot point because worrying about obtaining more credit any time soon is ludicrous. Repairing the damage already done should be the primary focus.

All in all, a mortgage modification followed by bankruptcy is a complex process.  Without the proper legal representation, you can find yourself in a situation that is more desperate than what you’re already experiencing.  

Do You Need Help to Save Your Home?

Finding the right attorney to represent you can be an overwhelming task.  If you have questions about mortgage modification or how to file bankruptcy, contact Bartifay Law Offices, P.C. today.  Our team of experts has been helping homeowners protect their properties since 1993.   We will be happy to assess your situation and recommend a strategy best suited for your needs.

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