How to Apply for a loan modification while in bankruptcy

Your trustee must approve every financial contract you enter into during bankruptcy.

Since 2009, bankruptcy laws have changed to not only allow loan modification during bankruptcy, but to encourage it. Prior to 2009, most loans were modifiable during either a Chapter 7 or Chapter 13 proceeding, but the old rules excepted mortgages in Chapter 13 plans. That is no longer the case.

Instructions

1. Make sure you qualify for a modification under current bankruptcy laws. In most cases, the collateral securing your loan must now be worth less than the balance you owe, and you must have made previous attempts with your lender to restructure the loan. If you're unsure if you qualify, consult with an attorney or speak with your trustee.

2. Inform your bankruptcy trustee that you would like to modify your loan. He will either notify your lender of your request or give you the proper documentation to complete and submit yourself. In New York, this is a "notice/request for loss mitigation/mortgage loan modification," but the exact form can vary from state to state. You will probably have to make the overture to your creditor. Most lenders aren't willing to risk violating your automatic bankruptcy stay, which prohibits them from contacting you or doing anything to collect the money you owe them.

3. Serve your request on your lender by certified mail, return receipt requested. The lender should get back to you within a reasonable period of time with an alternative to your current loan. Otherwise, it will file an objection or notice with the bankruptcy court, indicating that it is not willing to enter into a modification. If the lender does nothing, give your mail receipt to the trustee, proving that the company received your request. The judge might enter an order requiring your lender to at least exchange documentation with you and negotiate.

4. Notify your trustee if your lender offers modified terms that you want to accept. The bankruptcy court must approve your new loan as part of your bankruptcy plan.

5. Notify your trustee if your lender refuses to modify your loan. If you're involved in a Chapter 13 plan and trying to modify your mortgage, the bankruptcy judge can now modify your loan to adjust your mortgage payment to a 31 percent debt-to-income ratio. Although your lender can't be forced to take part in the new federal program that allows judges to do this, the government offers attractive incentives to lenders who cooperate.

Tips & Warnings

• Don't mistake overtures from your lender to "reaffirm" your loan for an offer to modify it. Reaffirmation and modification are two different things. Many lenders will offer to reaffirm loans as soon as you file for bankruptcy. Reaffirmation means that both you and your creditor agree not to discharge the debt because you will continue paying it. All the old terms and interest rates continue to exist, and your payment won't go down. Modification involves lowering your monthly payment so that it's more manageable, usually by restructuring the loan balance in line with the collateral's current value. The lender might adjust your interest rate as well, to meet the federally-prescribed debt-to-income ratio.

References

• USFN; Loan Modification During Chapter 13 Bankruptcy Cases; Maria Tsargis; 2008
• Foreclosure Law Firms; Loan Modification Under HAMP During Bankruptcy; 2011
• Katzner Law Group, P.C.; Mortgage Loan Modification; 2010
• Attorneys for Consumers Loan Modification: Chapter 13 Bankruptcy Loan Modification
• The Bankruptcy Site; Is it Possible to Modify a Home Loan During a Chapter 13 Bankruptcy?; 2011