A question I am asked with increasing frequency is what happens to a mortgage modification negotiation when the borrower files bankruptcy.   Of course we all know by now that the answer is that “it depends.”

First, it helps to understand how most lenders staff these situations. There seems to be a common misconception that each loan and lender has a single, intelligent and rational professional banker assigned to it, who is charged with carefully weighing alternative courses of action, making intelligent decisions about each loan on an individual basis and maximizing the bank’s chances of earning the most return on its investment.  To that I say “fuggedaboutit.” Most lenders are in complete disarray and wouldn’t recognize a rational business decision on a loan-by-loan basis if it bit them on the nose. Remember, these are the same people that created this fiasco. It seems that the American banking industry has taken Will Rodgers seriously when he said, “If stupidity got us into this, why can’t it get us out of it.” I find it most useful to assume that there is no intelligent life on the other end of a telephone when I call a bank, an assumption which, while cynical, makes life easier by reducing my frustration when Forrest Gump answers.

The people tasked with analyzing and negotiating mortgage modifications are not the same people as those tasked with managing loans that fall into bankruptcy. So when you are negotiating for a possible loan mod and you file bankruptcy, in most cases the whole file gets transferred to someone else’s desk because the bank now has to take certain actions to protect itself that weren’t required pre-petition. They are going to shift into a different mode of “damage control.” That doesn’t mean that the loss mitigation folks can’t talk to you, but a bankruptcy filing is most definitely a game changer. (It is likely that, if you are able to actually negotiate a modification, court approval will be required, but that is a different subject and not within the scope of this post.)

Can you still negotiate a modification? Yes. There is no legal reason why a loan can’t be modified while the borrower is in bankruptcy. Will it happen? That depends on whether the bank keeps the loss mitigation representative involved in the game and talking to you (or your lawyer), and whether that person has a minimal level of motivation and intelligence, or whether they shut that process down.

In a situation I was recently involved in for a client, the lender had first denied the loan mod prepetition because the borrower’s income wasn’t high enough. When he resubmitted with different numbers, the loan mod was denied because he made too much.  After the bankruptcy petition was filed, and after the discharge was entered, the lender called me telling me that a loan mod had actually been approved. But when they sent me the documentation, all it was was a new, blank application intended to start the loan mod application process all over again.

Real chances of getting a loan mod are impacted by a lot of different factors, some logical and some which make no sense at all.  Bankruptcy may be a factor, but it doesn’t need to drive the end result.

15 Responses to Mortgage Modifications and Bankruptcy: Can You Still Modify a Mortgage After Filing Bankruptcy?

  1. Lawyer says:

    Your blog is so informative

  2. Lawyer says:

    You made some good points there. I did a search on the topic and found most people will agree with your blog.

  3. You know this is hard to find. Thanks for a great post.

  4. As a Freshman, I am always looking online for articles that can help me get further ahead. Thanks a million!

  5. Home Loans says:

    thanks !! very helpful post!

  6. Thank you for your help!

  7. WOW!!!!! that was just what i wanted to know, informative and to the point, please keep up the brilliant work and i will be back for more soon!

  8. While this topic can be very challenging for most people, my belief is that there has to be a middle or common ground that we all can find. I do value that you’ve added pertinent and intelligent commentary here though. Very much thanks to you!

  9. Liana Perze says:

    WOW!!!!! that was just what i wanted to know, helpfull and to the point, please keep up the great work and i will be back for more soon!

  10. Bari Escobedo says:

    When was this published? I’ve been looking all around for weeks for decent info. Great article, I’ve bookmarked the site.

  11. http://usinforeclosure.com/2010/02/08/foreclosure-help/ says:

    Hi, Good content throughout the site. This post is probably where I got the most useful information for my information gathering. Thanks for posting, maybe we can see more on this. I also like this layout can you tell me where to get it

  12. Foreclosure Help says:

    Hello, I have browsed most of your posts. This post is probably where I got the most useful information for my research. Thanks for posting, maybe we can see more on this. Are you aware of any other websites on this subject?

  13. Super-Duper web web site! I’m loving it!! Will come back again – getting you feeds also, Supplies Gives thanks.

  14. Nice post. I like your site.

  15. Jeffery Sokolowski says:

    Thanks for the great insight on that, never really thought about it. bookmarked your site!

%d bloggers like this: