(LoanSafe.org) – The great majority of borrowers who are looking to file Chapter 7 bankruptcy are also very concerned about losing their home. Especially during these hard financial times. Many homeowners have been victim to declining home values, subprime adjustable rate mortgages, and an economic crisis that has caused the unemployment rate in America to skyrocket.

Due to factors such as these, many borrowers are relying on their credit cards, savings, and other debts to help with their financial struggles. The result of this has led many people to pursue bankruptcy to escape uncontrollable debt, while at the same desperately needing a loan modification to save their home from foreclosure.

We are often asked by homeowners who are currently pursuing bankruptcy, whether it would be a good idea to go for a loan modification prior to or after filing for bankruptcy. First of all, it is important to note that we are not lawyers but mortgage commentators. When you are faced with a legal situation such as this, it is always best to consult weith multiple attorneys in your state.

What you need to understand is that there is no definitive answer when anticipating how the mortgage lender will react to the BK. However, there are a few rules that can help elaborate this situation.

  • One of the most important things an individual needs to know in this situation is that filing for Chapter 7 will stop any loan modification that is in process.

The reason being is that when you file, a “automatic stay” is placed on all your creditors that will prohibit them from collecting from you and pursuing any judgements.  During the automatic stay, mortgage servicers will generally not negotiate with homeowners who want to pursue a loan workout. Therefore, a borrower who has been in the loan modification process for a while and is close to obtaining a modification may want to wait to file. Unless of course they are very close to foreclosure and cannot wait any longer. Some bankruptcy attorneys may try to still negotiate a modification through reaffirmation agreements, but that approach seems to have a very low success rate.

Another important factor when determining whether or not to begin the Chapter 7 bk or loan modification is the current status of the borrower’s mortgage. For those out there that are current on their mortgage payments and ae looking to file a Chapter 7, it may be beneficial to go ahead and file right away. One reason why is because most banks will not even consider a modification unless the homeowner has become delinquent on their mortgage.

Instead of letting the loan go into default so one can potentially achieve a modification, it may be a good idea to go ahead and file at this time. The fact that the property has not been in default will make it much easier to reaffirm the debt, and it is unlikely that the lender will object or seek relief from the automatic stay so they can begin the foreclosure proceedings since the mortgage will not be far behind.

Therefore, a borrower has been in default on their mortgage for multiple months (more than 6), pursuing a bankruptcy prior to obtaining a loan modificaiton may be the wrong choice. Some homeonwers who did choose to do this may find their lender seeking relief from the automatic stay so they begin foreclosure. banks will be eager to initiate foreclosure if the borrower emerges form their bankruptcy a year behind on their payments. as a result, there will not be much time to process the loan modification.

Since these are just some of the factors involved in making this decision, we strongly suggest going out and consulting with a local bankruptcy attorney about this matter. Any reputable attorney will give you the initial consultation free of cost.

Moe Bedard
My name is Maurice "Moe" Bedard. I am the founder of America's #1 Mortgage Forum, LoanSafe.org. My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications.