After going through a Chapter 7 bankruptcy and having a discharge on your mortgage, can you still get a loan modification?
This question is very common from people facing bankruptcy or who have already experienced bankruptcy discharge through filing a Chapter 7. One such filer recently shared their personal bankruptcy story online at a bankruptcy forum. The debtors where 2 ½ years post Chapter 7 bankruptcy, had not reaffirmed their mortgaged house, had voluntarily made mortgage payments on the house up until now, and they wanted to know how to get a modified loan after their discharge. They are beginning to struggle financially again making the high mortgage payments, but the mortgage lender will not consider modifying the loan as long as the debtors keep paying the payments on time.
The former debtors are still experiencing bad credit with the bankruptcy still on their report, do not have enough money for a down payment on a new mortgage, the home needs repairs they cannot afford, and they do not have the money to move out to rent a place the size of the home they now live. If the former debtors try stop payments, they are afraid the mortgage lender will foreclose on the property.
The stress caused by their fears is unfounded. The couple is not going to get the help of government or the mortgage lender for a loan modification after a discharge until they show a financial need. Their current situation is deceiving to the government and mortgage lender because the couple had all their unsecured debt discharged in the Chapter 7 bankruptcy they filed, and since they are making their mortgage payment on time, it appears they are not currently showing any financial need to get a modification.
The truth is, the couple are still financially struggling with the high mortgage, and they are allowing the house to deteriorate in order to make the mortgage payments. The only way to bring that fact to the attention of the government and mortgage lender is to stop mortgage payments right away.
Stopping payments that are not owed and have been discharged in bankruptcy will have two effects on the government and lender. First, it will alert both entities who can potentially make a loan modification that there may be a financial need after all. A house that is not kept up properly quickly loses what value it has. Secondly, by stopping the mortgage payments, the owners can save the mortgage payment money in order to make a down payment on another loan or move. The Sheriff’s sale on a foreclosure is still out near 12 months in most states. That time will give the homeowners a chance to save enough money before they have to leave the house. Too, with showing the financial need for modification help, the homeowners might negotiate with their mortgage lender or qualify for a government modification if they want to keep the house.
Walking away from the house might be the worse thing the couple can do at this point. Like bankruptcy, foreclosure is a legal process that takes time. Understanding the complicated loan modification, foreclosure, and bankruptcy laws can help the couple to make the best decision concerning what to do about the discharged home. Getting legal advice from a lawyer may be wise at this point.
- Bankruptcy and a Two Year Wait for a Mortgage After (betterbankruptcy.com)
- Bankruptcy and the Mortgage Forgiveness Debt Relief Act of 2007 (betterbankruptcy.com)
- Chapter 7 and Mortgages (bonjupatten.com)
- 5 Common Misunderstandings About Mortgage Loan Modification (pro2sell.com)
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