Bankruptcy

Bankruptcy, Mortgage Modification, and Short-Sales

By Jonathan Alper

Many people file Chapter 7 bankruptcy to eliminate unsecured debts at the same time they are trying to reduce secured debts through a modification of their home mortgage or a short-sale of their home. Bankruptcy clients have reported that their mortgage lender told them that filing bankruptcy will prevent mortgage modification or short-sales. Bankruptcy can affect the modification or short-sale process, but bankruptcy does not prohibit or preclude modification and short-sale. Many bankruptcy clients may be misunderstanding their mortgage lender?s statements. Filing bankruptcy institutes an "automatic stay" which protects the bankruptcy debtor from creditors? debt collection. The mortgage lender does not want to violate the automatic stay. The lender may believe that working with the bankrupt homeowner to modify a mortgage or negotiate a short-sale is a violation of the bankruptcy stay. For that reason, most lenders will refuse to work with a homeowner once the homeowner files bankruptcy until the court issues a discharge order. The bankruptcy discharge lifts the automatic stay.

A bankruptcy debtor can help himself and the lender bypass the automatic stay in order to resolve a problem mortgage. I have filed on behalf of bankruptcy debtor?s a motion to lift the automatic stay for the limited purpose of allowing discussions between the debtor and his mortgage lender. The bankruptcy judges in our court have granted these motions without requiring a hearing. It has taken about one week to file the motion and receive a court order lifting the stay. The limited relief from the stay does not expose the debtor to debt collection activities. The order does permit the debtor to work on this mortgage problem while in Chapter 7 bankruptcy. Bankruptcy may delay mortgage modification for a short time, but bankruptcy is not incompatible with mortgage modification or short-sale negotiation. Rather, eliminating unsecured debt usually improves the debtor?s ability to afford a proposed mortgage modification plan.

posted by Jonathan Alper, banrkuptcy and asset protection attorney, Orlando, Florida

Full post as published by Florida Bankruptcy Law on August 02, 2009 (boomark / email).