The vast majority of bankruptcy clients are concerned about keeping their homes. Many of them have been victims of falling home prices, adjustable interest rates, and a bad economy that has caused high rates of unemployment. Because of these factors, most homeowners rely on savings, credit cards, and other debt to finance their lives while protecting their homes. The result is that most clients need bankruptcy to escape debt while simultaneously needing to modify their home loans in order to avoid foreclosure.
For those clients considering Chapter 7 bankruptcy, I am often asked the question if a client should pursue a loan modification prior to or after a bankruptcy. First, every bank is different and there is no definitive strategy when anticipating how the bank will react to bankruptcy. However, there are a few clear rules that can provide a framework for action.
First, Chapter 7 completely stops any attempt at a loan modification. Under the automatic stay, banks will not negotiate with debtors who want to continue discussions about loan modifications. Thus, a debtor who is close to obtaining a trial modification should not file bankruptcy unless they absolutely cannot wait any longer and are willing to restart negotiations following discharge from bankruptcy. Some attorneys may try to modify the mortgage in Chapter 7 bankruptcy through reaffirmation agreements but that approach is outside the scope of this entry and has a low success rate.
Another guideline to consider when deciding whether to begin Chapter 7 bankruptcy or a loan modification is the status of the current loan. For clients who are current on their mortgage and want to file bankruptcy, it may make sense to file bankruptcy immediately. Many lenders will not modify loans unless they are in default. Rather than going into default to eventually modify the mortgage, it may make sense to file bankruptcy during this time. Because the home has not been in default, it will not be difficult to reaffirm the mortgage and it is not likely that a creditor on the mortgage will object or seek relief from the automatic stay to initiate foreclosure action since the home has not been in default for long.
Conversely, if a client is in default on a home for several months (greater than 6), filing bankruptcy before obtaining a home modification could be the wrong decision. Many of these clients find the lenders challenging the bankruptcies and seeking relief from the automatic stay to initiate foreclosure. Banks also seem quicker to file a notice of sale when the client has been in default for a long time and has emerged from bankruptcy. As a result, there is less time to work out a loan modification following bankruptcy and much effort has to be focused on pushing off sale dates rather than the modification.
While these are only a few of the considerations to be made when deciding what to do first, contact our office for a full evaluation. We can help you determine if Chapter 7 is right for you and if you are best starting with Chapter 7 bankruptcy or working first with our loan modification division.
This post was written by Benjamin Yrungaray
Benjamin Yrungaray handles bankruptcy and loan modification cases at First Source Law. He is a member of the state bars of California (#256224), Pennsylvania (#208558), and New Jersey. He is also admitted in the Central District Court of California, Southern District of California, and New Jersey District Court.
