The real estate bubble is one the primary culprits behind the rise in individual bankruptcy filings. Currently an astonishing 22.5% of home borrowers have home mortgage balances with negative equity. Many debtors therefore are looking for ways to reduce their monthly payments, if not get out of their home obligation entirely.
In an effort to avoid filing bankruptcy, nearly every home owner with a troubled mortgage has attempted a loan modification to some degree. Although most attempts usually fail, even on the rare occasions when the modification has been approved, the debtor often still feels the need to file bankruptcy. As such, it is important to consider the impact and ramifications of a home mortgage loan modification before, during and after bankruptcy.
Loan modifications before a chapter 7 bankruptcy are not binding as to the note unless reaffirmed in the bankruptcy. If the loan is not reaffirmed in the bankruptcy, the note is then discharged. The debtor and lender can still honor the agreement as to the lenders lien rights (under a stay and pay scenario) without a reaffirmation agreement, but the note obligation would be forever discharged. Therefore, a debtor who saw his/her monthly mortgage payments slashed in half with a modification before bankruptcy might still not want to reaffirm the mortgage in the bankruptcy if the principal balance was not reduced and the home still has negative equity.
Loan modifications during a chapter 7 bankruptcy are binding if they are approved by the bankruptcy judge through a signed reaffirmation agreement. The debtor can still reaffirm a note which is not the exact same deal as the pre-petition obligation. A modification is essentially a reaffirmation agreement under better terms. Any modification agreed to during the case without bankruptcy court approval is not binding as to the debtors obligation on the note and is discharged.
Loan modifications after a chapter 7 bankruptcy can only be binding as to the debtor on the note if the debtor reaffirmed the mortgage with court approval during the pendency of the bankruptcy case. 11 USC 524 prevents the debtor and creditors from entering into an agreement after bankruptcy for a debt that was discharged in bankruptcy. Therefore, unless the mortgage was reaffirmed in bankruptcy, any post discharge home modification is only binding as to the creditors lien rights.
Loan modifications before, during and after a chapter 13 bankruptcy are binding as to the debtors obligation under the note because the debtor who retains a home in the chapter 13 does not discharge the note. The debtors chapter 13 repayment plan is determined in part by the amount of money available to the debtor after the debtor pays the home mortgage, so a modified mortgage can lead to an increased payment to the debtors unsecured creditors.
It is important to note that most modifications start with a three-month trial period where the lender can back out for almost any reason before offering a permanent modification. One popular reason lenders deny permanent modifications is because of changed circumstances. As such, debtors should be wary of filing bankruptcy during the 90-day temporary modification trial period and just assuming the lender will continue to honor the modification agreement.
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My question is in regards to the loan modification after a chapter 7 filing. I did not reaffirm the debt in the bankruptcy and want to know if i am personally liable for any deficiency if I do a short sale?
Marilyn, when you do not reaffirm a debt in chapter 7, it is discharged. As such, you are not liable for any deficiency, and it makes limited sense to do a short sale given those conditions. I’m not stating a golden rule on this topic as there are some minor advantages to doing a short sale (for instance, does your property have HOA dues?), but for the most part, it’s not worth bothering with.
I’ve actually written a blog on this very topic, which you can read at the link below. The pertinent part is copied and pasted below the link to the whole article:
http://brickslaw.com/bankruptcy/short-selling-house-bankruptcy-rarely-sense/
For example, let�s say the debtor owns a house worth $130,000 and has a mortgage at $150,000. The house has negative equity, so if the debtor was not filing bankruptcy and wanted to get out from the house, the debtor would have to either sell it for a $20,000 loss and pay the difference at closing or get the bank to approve a mortgage short sale to forgive the deficiency.
However, now take the same numbers, but put the debtor in a chapter 7 bankruptcy. In this scenario, the debtor does not have to worry about trying to get a short sale approved to cover the deficiency, because the debtor can simply choose not to reaffirm the mortgage within the bankruptcy. By not reaffirming the mortgage, there is no balance owed to the bank, and the debt is discharged in the bankruptcy. Since the debt is discharged in the bankruptcy, then there is no incentive for the debtor to work a short sale, as the debtor can walk away without financial repercussions as to the note at any point.
I keep seeing this when I search “any post discharge home modification is only binding as to the creditor�s lien rights”. We have completed a CH7 BK in August of last year due to my wife going through cancer for over a year and our home was then discharged. We have been paying the mortgage still in order to stay, but have not reaffirmed. However, the monthly payment is still too large for us to stay in the house. We were wanting to try and do a modification, but I see that under “11 USC 524 prevents the debtor and creditors from entering into an agreement after bankruptcy for a debt that was discharged in bankruptcy”. So my question is, what does the section mean which states that “any post discharge home modification is only binding as to the creditor�s lien rights”? Does this mean we can do a modification without reaffirming and no recourse besides the debtor taking back the property if we stop paying after a modification? Thank you for any feedback.
Brian, I am sorry to hear about your wife’s bout with cancer. As to your question, you have apparently been discharged in bankruptcy without reaffirming the note. As such, you can no longer reaffirm the note, which means this creditor cannot bind you to any personal obligation on the note.
Therefore, in short, yes, the creditor can work out a modification with you, but they can no longer have any recourse other than taking back the property.
However, please note that if you do refinance the house and take out a new note, that note will not be subject to the bankruptcy and discharge.
I am 18 months post chapter 7 discharged. I stopped paying my non-reaffirmed monthly mortgage payments so I am now 7 months delinquent. My loan is a VA loan. The bank holding the mortgage will not report my payment history to the credit agencies, is a loan modification worth a try? I am only trying to reestablish my credit. In fact all the months I have failed to pay (7 months) I have put aside in an attempt to purchase another home if possible. What is the best way to go?
Modifying a mortgage that has already been discharged should not alter the fact it is not being reported to the credit bureaus. 11 USC 524 does not allow for a discharged debt to be revived after the discharge.
I reaffirmed my mortgage through a chapter 7 almost 2 years ago however I can no longer make the payments. I received a modification prior to the discharge which now I’ve learned that they hold a second mortgage for that modification amount aside from the initial mortgage. The house does not have enough equity to sell. What are my options?
I rarely recommend reaffirming a mortgage in a Chapter 7, and this is one of the reasons why. I would check the case docket of your case and make sure you in fact reaffirmed. The approach is entirely different if you did not reaffirm. Assuming you did reaffirm, you now legally owe this debt. As such, if you cannot make the payments now and the house has no equity, you are looking at damaging your credit with missed payments and either a foreclosure and/or short sale and possibly facing a deficiency balance lawsuit. If so, you are going to have to try to work something out with the bank.
If you did not reaffirm, none of the above problems should concern you. In theory you still want to work with the bank on a move out plan, but at least those other problems are not issues since you would not legally owe the debt.