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Using Bankruptcy to Save a Home is a Challenge and Must be Done with Careful Planning.

It is also important to have the assistance of an experienced Chapter 13 attorney. WARNING: The default rate for individuals filing their own chapter 13 is more than 98%.

We have finally seen the total evolution of the mortgage crisis. From 2008 through 2011, lenders were rejecting most or all loan modifications. Clients had to file Chapter 13 bankruptcy to try and save their home and repay delinquent mortgage payments.  The majority could not afford the bankruptcy and regular mortgage payment, so many not only lost their home, but also stained their credit with a bankruptcy notation.

Now, mortgage lenders appear to be easing loan modification requirements.  While I do not have any specific numbers, I can just see the difference on a client-to-client basis.  I am not filing as many Chapter 13 bankruptcies as three or four years ago, and the ones we are filing seem to end early because the lender approves a loan modification.

Beware of clauses in the modification that say you will pay a lump sum on a specific date.

If there is an opportunity to modify the first mortgage – check into it.   Make sure the lender knows you are in bankruptcy.  Determine the exact terms (interest, balloon payments, etc).  Since you will not be inside the Chapter 13 bankruptcy for the rest of your life, this modification will help your monthly cash flow once you complete your case.  That will make your life much easier after bankruptcy.

If the modification appears to be in your best interest then you will need to obtain a court order approving the modification agreement. You may also need to modify your Chapter 13 plan payment. Most loan modifications lower your monthly payment, which will leave additional money in your budget. You will not be able to benefit from that extra money while the Chapter 13 case is still active. The trustee assigned to your Chapter 13 case will want you to use that additional money to pay more to the other creditors, including the second mortgage being eliminated. This is an important step not to ignore as your first mortgage payment may come down significantly after the loan modification.

If you have a second mortgage – A chapter 13 reorganization allows the borrower to strip off their second mortgage so long as the house is worth less than the debt of the first loan.  To completely eliminate that second mortgage the Chapter 13 plan must be completed and the debts discharged. A modification of a mortgage is completely different from a lien strip.

We have several videos on our web site.  Below are a few that might be of interest:

  • “The Chapter 13 Bankruptcy Process”
  • “Lender’s Foreclosure Rights in Arizona”
  • “Should I keep my home or let it go into foreclosure?”
  • “Meet Ms. Drain and Suggestions on How to Hire an Attorney”

Talk to your bankruptcy attorney about the chapter 13 process.  They will be able to explain how the process works and the pitfalls that you much watch for.  If your attorney does not seem to “get it or care” then hire a more experienced attorney.