This is one of those little-known facts, that the vast majority of ATTORNEYS that handle bankruptcy have no idea about, either due to lack of skill or incompetence. Although there is no guaranteed way of obtaining a mortgage modification in chapter 7 bankruptcy, there are two opportunities that can be taken advantage of due to a chapter 7 bankruptcy to obtain a mortgage modification. One is during the chapter 7 bankruptcy and the second, is after you obtain your chapter 7 bankruptcy discharge. Before explaining further, neither of these methods is a guarantee, the should only be taken by those who were not able to obtain a mortgage modification and without a mortgage modification are going to lose their home anyway. If you want a more concrete method of obtaining a mortgage modification to bankruptcy, please read my blog about chapter 13 bankruptcy and obtaining a mortgage modification through motion use. As I tell all my clients this method is a gamble at best and should only be utilized by those who have no other options, such as chapter 13 bankruptcy.
The first point that you will be able to use chapter 7 bankruptcy to leverage a mortgage modification from your bank is through the use of a reaffirmation agreement. Essentially this is an agreement with your bank to exclude your home mortgage from your chapter 7 bankruptcy and also gives you a chance to renegotiate the terms of your mortgage, or what is otherwise known as a mortgage modification. Now let’s consider what you’re doing with your chapter 7 bankruptcy, you are wiping out all of your unsecured debt, mainly credit cards and medical bills. This will leave most people with only their home mortgage or possibly a car loan to deal with, while taking away all the unsecured debt. Now you’ve placed yourself in a more financially stable position since you took the proactive decision to file for chapter 7 bankruptcy. Your bank also knows that if they choose not to reaffirm the mortgage under terms that you agree to, the foreclosure process will be much lengthier and costs more to them and the amount of time you will be staying in the home will be significantly longer. So through the use of the automatic stay of the chapter 7 bankruptcy you taking control of the bank, instead of the banks controlling you. So if your bank will agree to a lower interest rate or extending the duration of the loan through the use of a reaffirmation agreement, you have effectively obtained a mortgage modification. Just be clear that you have not discharge the mortgage under your chapter 7 bankruptcy and if you default on this reaffirmation agreement, your chapter 7 bankruptcy will in no way be able to protect you from that debt. But for those who have no other options this is certainly a powerful tool, that most bankruptcy attorneys do not take advantage of.
The second method of obtaining a mortgage modification, is after you have received your bankruptcy discharge. The banks realize that in many states you have the right to remain in your home after you receive a bankruptcy discharge up to 150 days or more, depending on the state you reside in. Furthermore depending on the state you reside in, they will have to evict you after they actually foreclose on your property. In the state of Massachusetts the eviction process can take anywhere from 3 to 5 months, or more. Due to the simple fact and the cost of following through with a foreclosure, after you receive a bankruptcy discharge many banks are willing to give you a mortgage modification. Understand this is because they know the costs associated with foreclosure and realize that they will not be able to go after you for any losses associated with the foreclosure. Basically if your mortgage is $300,000 and they sell your house at foreclosure sale for $200,000, they are still out $100,000. Also the reason they are willing to offer you a mortgage modification after your chapter 7 bankruptcy is that you have eliminated the vast majority of your debt, you’ve gotten rid of your credit card bills and your medical bills, which make it almost impossible for some people to pay their mortgage payment. So since you are in a better position now that you’ve actually file chapter 7 bankruptcy, even though your credit has been hurt, they will be willing to give you a mortgage modification for those reasons. The last reason is a little sneaky, but the banks know that since you file for chapter 7 bankruptcy re-signing a mortgage modification takes their mortgage out of the bankruptcy and makes you obligated for it again, and you cannot file chapter 7 bankruptcy against that debt for at least another eight years. So if you default on that mortgage modification, you have no recourse in chapter 7 bankruptcy for another eight years and this is another reason why the banks are willing to give mortgage modifications to people who are file for chapter 7 bankruptcy.
And only take the good points from it and not read the bad. None of this is a guarantee. Do not try to do this without an experienced attorney. You do not have the right to a mortgage modification. This is at best a gamble, that should be left up to people who have no other choices, such as taking advantage of chapter 13 bankruptcy in obtaining a mortgage modification to that method. Please read my blog on obtaining a mortgage modification through chapter 13 bankruptcy to understand the difference.
Joseph F. Botelho, Esq.
BOTELHO LAW GROUP
Attorneys At Law
901 Eastern Ave.
Fall River, MA 02723
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