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Chapter 7 and loan modification troubles

Some Floridians who filed personal bankruptcy may seek a loan modification from their lenders with no success. In certain cases a lender won’t modify a mortgage loan, but homeowners still need to get caught up on their mortgage arrearage. It may seem like a lose-lose situation. However, that doesn’t mean residents may not have a way to save their homes from foreclosure.

Chapter 7 bankruptcy allows an individual to get rid of unsecured debts. A trustee discharges, or eliminates, debts. That debt doesn’t include back mortgage payments because those are considered secured debt. Debtors can file chapter 13 bankruptcy after filing chapter 7. Debtors who do this can’t receive a ‘discharge” of debts. Debtors won’t need the discharge because unsecured debts were already eliminated.

Chapter 13 gives debtors a way to pay back mortgage payments in three to five years. While making current payments, debtors make payments to the trustee assigned to the bankruptcy case. The trustee distributes the payments to the lender. During this time, a lender can’t foreclose or sell the homeowner’s property as long as both payments–current mortgage payments and chapter 13 payments–are current.

Filing Chapter 13 may be beneficial for people who want to save their homes from foreclosure or auction. Unfortunately, mortgage lenders don’t like it when homeowners have an active personal bankruptcy case. So, they may reconsider the offer to modify the loan to get a debtor to close their bankruptcy cases. Anyone trying to save their homes and who have a prior chapter 7 typically seek out legal counsel. A bankruptcy lawyer may look into the situation to see if a debtor can file chapter 13.

Source: Fox Business, “Will Bankruptcy Help Mortgage Modification?”, Justin Harelik, June 11, 2013

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