In many instances, homeowners who need a loan modification also have other debts burdening them and file bankruptcy as well. Bankruptcy and loan modification have become a pretty common combination for a complete financial fresh start. There are two types of bankruptcy most commonly filed by homeowners, chapter 7 and chapter 13. The numbers refer to the section of the bankruptcy code that you’re filing under.
Loan Modification and Chapter 7 Bankruptcy
For homeowners filing a chapter 7 bankruptcy, I often get the question which to do first or what’s the best way to go about doing both the loan modification and the chapter 7 bankruptcy. Generally, my opinion is that doing the bankruptcy first gives a slight advantage, but it’s not absolutely critical. The reason behind it is that bankruptcy will (if all goes as planned), discharge all other debts, other than the mortgage debt that the borrower wants to keep paying. Once other debts are gone, the lender views the homeowners ability to pay mortgage payments as better, and therefore is (slightly) more likely to approve a loan modification. The bankruptcy court does not need to be involved at all with a loan modification after a chapter 7 bankruptcy, the two operate independently.
Loan Modification and Chapter 13 Bankruptcy
In a chapter 13 bankruptcy, the process is different. Generally in chapter 13, the debtor (homeowner), has made a commitment to pay all disposable income to the chapter 13 trustee. This includes any money “saved” from a lower mortgage payment. Additionally, all matters relating to debt, creditors, and monthly re-payments are overseen by the chapter 13 trustee, and must go through and be approved by the bankruptcy court. So once the loan modification is accepted by the homeowner, two things should happen: 1) the new new payment structure should be approved by the bankruptcy court, and 2) the chapter 13 plan should be modified and approved by the bankruptcy court. Most bankruptcy lawyers do charge an additional fee to get court approval for these things, but the monthly savings from a lower mortgage payment is probably well worth it.
California Loan Modification and Bankruptcy Attorneys
Since loan modification and bankruptcy are really two different, and unique, legal services, it is important to look for an attorney who handles both loan modification and bankruptcy. McFarlin LLP represents clients in all aspects of loan modification and Bankruptcy in Riverside, Corona, San Bernardino County and throughout California. Our attorneys are available to speak with prospective clients and give you honest advice.