Bankruptcy clients are usually concerned about what they are going to do with their homes after the value has dropped substantially. Many 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 also needing to modify their home loans in order to make ends meet.
For those clients considering Chapter 7, the question becomes whether 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.
For clients who are current on their mortgage and want to file bankruptcy, filing bankruptcy immediately probably makes sense. Lenders generally wait until a loan is in default before they will discuss a modification. Rather than going into default to eventually modify the mortgage, filing bankruptcy first becomes a smart choice. Because the home has not been in default, the client keeps the house and continues to make payments. After the bankruptcy, the client can again pursue the modification.
Chapter 7 can stop an attempt at a loan modification which is in process. 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. Once a modification has been achieved, a Chapter 7 filing makes sense. Unfortunately, it is often difficult to figure out when a modification will be approved because the bank determines the time frame.
In a bankruptcy, the client controls the timing.
The bottom line is you should contact a professional when coming up with a plan for action. Sometimes it makes sense to file bankruptcy first while in other situations you should pursue the modification first. Still other times, a Chapter 13 bankruptcy is the best route to pursue. The key ingredient is the current status of the mortgage because that triggers the bank’s willingness to talk modification and also determines the client’s power to keep their home in a Chapter 7.