What Happens to my Mortgage Modification if I File Bankruptcy?

A Chapter 7 or Chapter 13 Bankruptcy Filing May Void Your Mortgage Modification Application

[caption id="attachment_2248" align="aligncenter" width="300"]mortgage modification Image by Steve Daniels courtesy of Wikimedia Commons[/caption] If you have already applied for a mortgage modification when deciding whether to file a Chapter 7 or Chapter 13 bankruptcy, there is a reasonable possibility that the mortgage servicer to whom you have submitted your modification may void or withdraw the modification.

The Mortgage Modification Process

A legitimate mortgage modification application will involve a formal application for a specific modification program (HAMP, HARP, HARP 2, etc.) to your current mortgage servicer. The application may require you to submit a large amount of documentation regarding your income, your expenses, your assets, and any number of other things that will allow the servicer to determine whether you are eligible for the program. Generally, at the conclusion of the application process, once you are approved, you will be required to make three or so "trial" reduced monthly mortgage payments. After you have successfully made these payments in a timely manner, the "trial modification" is generally converted to a permanent modification. (Note that less scrupulous "modification processes" sometimes offered by even the largest mortgage servicers in the US involve a request for reduced trial payments while the application is in process, which gives them, then, the ability to inform you in one breath later on that not only is your application denied but you are now in danger of foreclosure because your payments are "deficient" under the terms of the original mortgage. Beware of any "great deal" offered by a mortgage servicer---and get everything writing before you take it for granted!)

The Effect of a Bankruptcy Filing on the Mortgage Modification Process

So what happens if you need to file for Chapter 7 or Chapter 13 bankruptcy while the application process is still underway, or while you are still making your three "trial" modified payments? Nearly always, the mortgage servicer will void or revoke their interest in the modification. Frequently, the application you sign to enter into the modification process will explicitly state that the filing of a bankruptcy constitutes grounds for the voiding of the application. The reason for this is, on one hand, a rightful fear of the mortgage servicer of an accidental violation of the "automatic stay against collections" injunction that clicks into place with the force of Federal law the moment the bankruptcy is filed, which prevents any creditor from committing any act that could constitute the collection of a debt while the bankruptcy is in process under threat of severe monetary and other sanctions. On the other hand, they also simply do it because they can.

Mortgage Modification Application and Bankruptcy Filing: The Bottom-Line

So what to do about it if you both want the modification and need the bankruptcy? The simplest answer is to wait until after the modification and its trial payment process have been fully completed and the mortgage fully modified before filing the bankruptcy. If you cannot wait to file because of a threatened or actual lawsuit, wage garnishment, or other collection action that you need the bankruptcy automatic stay to stop, then the question will be to ask yourself how badly you need this modification at this time and to consider whether the harm you suffer from not filing the bankruptcy will outweigh the benefit of the modification. Depending upon the answer, you may decide that a mortgage modification that will decrease your monthly payment by $75 or $100 is less helpful than stopping a garnishment threatening to take 25% of each of your paychecks for X months or years. The bottom-line is the an experienced Michigan bankruptcy attorney will be able to assist you in computing the best filing timing for your bankruptcy petition relative to other irons you may have in other fires and to help you to determine whether the "modification" you've applied for is worth holding out for, or if it is a collections dodge by your servicer. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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