Can You Use Bankruptcy to Modify Your Mortgage?


If you face financial difficulties, making your mortgage payment is probably a big part of those difficulties. The mortgage payment is usually a family’s largest monthly obligation. Even if you consider bankruptcy—or have entered bankruptcy—you have options for dealing with your mortgage. These include:

  • Refinancing
  • Modification

Refinancing can lower your interest rate or otherwise make your mortgage terms more favorable. It replaces your old loan with a new one. You can refinance with your current lender or a new one. Refinancing, however, requires creditworthiness and the value of the home to exceed the amount you need to borrow. For people considering bankruptcy, bad credit can cause problems.

Modification changes the terms of the loan, but it remains the same loan and lender. Furthermore, a person seeking a modification does not need the same level of good credit that a refinancing usually requires. Loan modifications, both private and through government programs, are intended for people in financial distress.

Can You Get a Modification if You Are in Bankruptcy?

The short answer is, yes. It is possible to modify your loan while you are in bankruptcy, either in Chapter 7 or Chapter 13, and come out of bankruptcy with fewer debts and a modified mortgage with lower payments and interest rates where the payments are current.

Requirements for a modification differ depending on your lender, and also whether the modification is through a federal program. Generally, though, you can qualify for a mortgage modification in bankruptcy if:

  • Your total housing costs exceed 31 percent of your monthly income
  • You are delinquent or in danger of default because of financial difficulties
  • The house loan is “underwater,” meaning that you owe more than the house is worth
  • You are not eligible for a mortgage refinance

If your lender approves a mortgage modification or you obtain one through a government program, your interest rates and your mortgage payments will decline. Bankruptcy can change how your modification is handled, but won’t change those two critical facts.

Chapter 7 bankruptcy liquidates your non-exempt assets to pay debts. Secured assets, such as mortgaged homes, are exempt from liquidation, and you may exempt certain amounts of property, including home equity. If you obtain a modification before you file for Chapter 7 bankruptcy, and you either have no equity or the equity falls under bankruptcy exemptions, you will keep your home—as long as you make your mortgage payments. If your application for modification comes after your Chapter 7 filing but before discharge, your lender is required to consider your application—the lender cannot simply reject your application out of hand. Your lender might even accept your bankruptcy petition and schedules in place of the application for modification.

Things are a little different under Chapter 13, which is a reorganization plan that repays a portion of your debts during three to five years. If you applied for a modification before filing for Chapter 13 but your lender has not yet approved you, your bankruptcy filing must notify the court about this modification application. Your lender must consider your application—even during bankruptcy. The lender, if it approves your application, works with you to obtain court approval. Because a mortgage modification will lower your payments, you must notify the bankruptcy trustee managing the repayment plan about your additional disposable income, which will then go toward paying unsecured creditors.

If You Are Considering Bankruptcy in Salt Lake City, Call Bankruptcy Attorney Jory L. Trease of JLT Law to Discuss Your Options

Bankruptcy complicates the loan modification process. If you face financial difficulties and are considering filing for bankruptcy, make the bankruptcy laws work for you. Bankruptcy can achieve certain things for you, but not others. Take advantage of a free case evaluation to determine how bankruptcy can help. You can contact me at (801) 896-9444 or through my online contact form.