As a debt relief attorney in Seattle I get asked a lot whether filing a bankruptcy will affect the debtors chances of obtaining a loan modification and whether a bankruptcy should be filed prior to or after filing for bankruptcy. It can be frustrating dealing with major lenders such as Wells Fargo, Chase, Bank of America, US Bank and others who seem to conveniently lose paperwork and drag out the loan modification process for several months if not longer to only deny the borrower a loan modification. Click HERE to read about former employees of Bank of America admitting to such tactics.
While obtaining a loan modification is the primary goal for many home owners, banks use their own calculations to determine whether or not they want to give you a modification. This is called a Net Present Value (NPV) test and waterfall analysis. Part of this calculation looks at whether you can in fact afford to keep your home. Therefore, by filing a chapter 7 bankruptcy, if you qualify, you could eliminate your unsecured debts such as credit cards and medical bills, and then put yourself in a better position to obtain a loan modification.
Further debtors may even seek out a modification while in a chapter 13 bankruptcy repayment plan which will stop a foreclosure while the borrower is in the plan and continues to make payments. A chapter 13 bankruptcy can also be filed after a chapter 7 bankruptcy to only include repayments on the home as the other unsecured debts will have been eliminated in the chapter 7 bankruptcy. Filing a chapter 13 bankruptcy prior to receiving a loan modification will at a minimum consist of your original mortgage payments plus whatever you are behind spread out over 60 months. There is also a maintenance fee that much be paid to the chapter 13 trustee which ranges from 3.5-6.5% of all debts repaid by the Chapter 13 trustee’s office. Therefore, in order for a chapter 13 bankruptcy to be successful you must have an income and must be able to afford your payments. If you receive a modification, your plan can be amended to reflect the modification.
Furthermore filing for bankruptcy also gives a borrower the added bonus of stopping a foreclosure if you have been waiting until the last minute for a modification or need additional time in which to short sell your home and you are facing a trustee sale. A chapter 13 bankruptcy may be filed anytime prior to your trustee sale and voluntarily dismissed at anytime. Some debtors find it helpful to file a voluntary petition without actually intending on going through with the chapter 13 bankruptcy in order to delay the trustee sale or even allow for them to qualify for Foreclosure fairness mediation at a later date. If enough time passes from when the bank initially issued their notice of default and notice of sale, the lender will have to start the process again from scratch.
Another option for borrowers is to request Foreclosure Fairness Act Mediation (FFA) which is available in Washington State. Requesting a mediation must happen no later than 20 days after the borrower receives a notice of sale and can only be requested by an attorney or housing counselor. Debtors may also file for bankruptcy while in a FFA mediation to eliminate unsecured debt and give them the best chance at receiving a loan modification as the FFA process moves forward.