In the event that a borrower is denied for a loan modification by their lender and later decides to file for bankruptcy, or if the borrower files for bankruptcy without first attempting to request a loan modification, a creditor may be forced to modify a mortgage loan by a bankruptcy court.
The U.S. Bankruptcy Code, the set of laws that govern bankruptcies and bankruptcy procedures in the United States, offers clear guidance on when a bankruptcy judge may force a lender to modify a loan in the event that a lender refuses to provide any such assistance to their borrower. In most cases, if the modification of a loan will be a benefit to all creditors, the bankruptcy court may order the lender to modify the terms of the original mortgage contract in order to lower the monthly payments of the borrower. Before a loan modification is forced on a lender, the borrower may be asked to come up with a modification plan on their own and must be able to justify to the court why such a plan is fair and reasonable to all parties. The borrower can present any plan to the court for review, from the lowering of an interest rate, the extension of a loan period, forgiveness of late fees, or a combination of such plans. If the court is convinced that such a plan would benefit borrower and lender, the court can approve the plan and the borrower can begin making their lower payments. Being able to present a plan of their own creation to the court is a benefit to all individuals who file for bankruptcy, and is one that should be taken advantage of if offered. The entire bankruptcy process is basically a negotiation process, so don’t be afraid to aim for the lowest monthly payment possible. Use the experience of your bankruptcy attorney to determine a fair and low amount for your particular case. The attorney will be able to let you know what number is most likely to get approved by the court and what number would be too low.
The idea of forcing a lender to modify a loan for the benefit of all creditors lies in the fact that if one loan is lowered, more money will be made available to satisfy the debts of the other creditors seeking compensation through the bankruptcy process. The bankruptcy court will often make every effort to work out a settlement / payment plan with all creditors, not just the ones with the most debt to collect.
Convincing a court to approve forced loan modifications during bankruptcy can be difficult, but it is not entirely impossible. The decision of the court to approve or deny the request will depend largely on the borrower’s ability to convince the court that approving such a request is paramount to the repayment of debts. This is where an attorney will come in handy. An attorney will know how to present the borrower’s argument to the court in a manner that the court will appreciate. Courts are places for fact, not emotion, and it is difficult for many homeowners to keep their emotions from clouding their arguments when they are fighting to keep their property.