When filing for Chapter 7 bankruptcy , one of the common questions I run across with clients is whether they should complete a loan modification prior to filing for bankruptcy or after. The answer to this question depends on your particular factual situation and whether completing a loan modification prior to filing for Chapter 7 bankruptcy, will affect your ability to file. There are a few issues you should be aware of in deciding when to complete your loan modification.
If you have started your loan modification process, but your loan modification has not been completed, then you may wish to complete your home loan modification prior to filing for bankruptcy. If you file in the middle of modifying your home loan, such as during the trial payment period, the lender may require you to restart the loan modification process. This means that the lender will require that you submit your loan modification package again to be reconsidered for a loan modification. If you have worked for a long period of time to complete your home loan modification, then filing for Chapter 7 bankruptcy, may affect your ability to finalize the process. Lenders will not negotiate to modify the terms of your loan when there is a pending Chapter 7 bankruptcy. The automatic stay results in mortgage lenders stopping the negotiating process, until they receive an authorization letter from your attorney. There are also lenders that will not require that the process be restarted and will continue to work with your during your Chapter 7 bankruptcy, after receiving your attorney’s authorization.
If you have not started the loan modification process, then you have the option to file for Chapter 7 bankruptcy and then start the process of loan modification while you are in Chapter 7 bankruptcy. The mortgage company will require that your attorney sign an authorization letter allowing them to contact you in regards to loss mitigation options including loan modification. Once they receive this authorization letter and the documents to begin the loan modification process, they can begin to process your paperwork.
If the loan modification is approved while you are in Chapter 7 bankruptcy, then the mortgage company may require that you obtain a court order approving the modification prior to the finalization of the loan modification. It does not appear that the bankruptcy code supports the idea that a court order of approval is required in order to finalize the loan modification. Many mortgage companies are under the impression that this is required and therefore will require that you obtain a court order if you are in bankruptcy.
The mortgage company may also wait until your Chapter 7 bankruptcy discharge to finalize your loan modification. Once your Chapter 7 bankruptcy case is discharged and closed, then the mortgage company will not require court approval for finalizing the loan modification.
It is important that you consult with a local bankruptcy attorney to determine whether modifying your loan prior to finalizing for bankruptcy is in your best interest. There may be facts in your case that would support filing before or after your Chapter 7 bankruptcy. If you are many months behind in your mortgage payments then filing for Chapter 7 bankruptcy before completing the loan modification process may not be beneficial.