Filing for bankruptcy? Modifying your home loan is still an option

It’s common for many people to ask whether homeowners can receive a home loan modification if they are in the midst of the bankruptcy process. The answer is yes.

Due to the collapse of the housing market that occurred several years ago together with stagnant middle-class wages, many homeowners today are stuck with mortgages they simply cannot afford. It's likely because they have an underwater mortgage, one in which borrowers owe more money than their home is worth.

Fortunately, mortgage relief options are available for struggling homeowners. But all too often, many homeowners are also struggling to pay other bills alongside their mortgage, like credit card debt, and turn to bankruptcy for financial relief.

So is it common for many people to ask whether a borrower can proceed with a home loan modification if they are in the midst of the bankruptcy process. The answer is yes.

Home loan modification programs

There are various home loan modifications options available for those who wish to refinance their mortgage.

The Home Affordable Refinance Program (HARP), the Home Affordable Modification Program (HAMP), as well as the Refinance of Borrowers in Negative Equity Positions program (F.H.A. Short Refi), are three different federal relief programs homeowners struggling to pay their monthly mortgage payments can apply for. The programs are available for either borrowers with underwater mortgages or ones at risk of foreclosure.

They are also available for those in the middle of a bankruptcy. However, homeowners who have filed a Chapter 13 bankruptcy-a type of bankruptcy where a monthly payment plan is made over a 3-5 year period to pay all or a portion of outstanding debts-typically need to jump through a few more hurdles often required when applying for a home loan modification.

Modifying a home loan while in a bankruptcy

In a typical mortgage modification agreement, both the borrower and lender work out an arrangement. However, borrowers in the midst of a bankruptcy will likely need to receive the loan approval from the bankruptcy court.

If the loan modification is approved and the borrower's monthly mortgage is reduced, the Chapter 13 payment plan is traditionally modified. This is because when borrowers file a Chapter 13, both the borrower's income and debts are tallied to determine the monthly payment under the plan. In many cases, if the loan modification agreement is approved, the monthly mortgage payment will drop.

Since the monthly mortgage payment is based on the borrower's monthly income, the bankruptcy trustee is likely to modify the Chapter 13 to allocate that money saved to pay other creditors that are part of the bankruptcy.

Long-term gain

It's important to note that although this extra income saved seems counterproductive to a borrower since it has to be allocated to pay other creditors-it's only during the 3-5 year Chapter 13 bankruptcy payment plan.

When the bankruptcy is discharged, borrowers will be able to reap the benefits of the home loan modification for years to come because they will have locked in a more affordable monthly mortgage payment.

Homeowners struggling to pay their mortgage and have questions about the home loan modification process are encouraged to consult with a bankruptcy attorney who can offer advice on individual circumstances.

Keywords: bankruptcy, underwater mortgage, foreclosure, home loan modification