Chapter 13 Bankruptcy Time Bomb: Mortgage Modifications Revisited

14 Sep Chapter 13 Bankruptcy Time Bomb: Mortgage Modifications Revisited

So you had to file a Chapter 13 bankruptcy to avoid foreclosure while waiting for your modification to be approved. You went through the “wash, rinse, repeat” process of submitting your documents over and over while the foreclosure process started and almost finished. Oh yeah, the lender says “don’t worry”, we’ll get to you soon. Sort of like being put on hold with the endless message,

“All of our customer service representatives are busy helping other customers, but please stay on the line because your call is important to us.”

Um,…. yeah.

But what about your house? Finally, you have to file Chapter 13 to stop the foreclosure which has somehow moved along. Methinks, your lender might speak with forked tongue.

So the foreclosure is stopped and your plan of payment has been confirmed by the Bankruptcy Court. But those payments are huge because they are designed to reinstate your mortgage by making up all your back payments and foreclosure costs as well as your current payments in the limited time of three to five years. You are struggling, but you will do anything to save your home. And then one day after about a year or so, the clouds break, the rainbows appear, and miraculously a mortgage modification arrives in the mail where the lender agrees to lower your payment and reinstate the mortgage as current if you just make your new payments on time. No back payments to be made up. Hallelujah!!! Salvation has arrived!

Not so fast, Sparky.

While you might not have had a second mortgage or home equity loan on your house as in my previous article, you did have those other pesky credit cards and miscellaneous debts. Remember those? Well, they’re getting paid something in your bankruptcy plan (or maybe not if you have a zero percent plan), but they are still out there. And now they are delinquent because the bankruptcy saved you from having to pay them while you got caught up on your mortgage. And there’s the time bomb sitting there in the corner waiting to go off….tick, tick, tick

Now that your mortgage payment has been made current by the mortgage modification, all that money in your confirmed Chapter 13 plan can go to your unsecured creditors. That will increase their recovery from as little as zero to as much as 100%. So your plan payment does not miraculously go down simply because your mortgage has gone down. The difference is now available for others. You have proven your ability to pay. You might get a sympathetic Trustee or Bankruptcy Judge to allow you to lower than plan payment a little bit, but you are not going to get the relief you hoped for. You are stuck in your Chapter 13.

Well, what about getting my Bankruptcy Case dismissed? That’s a possibility, but now those credit cards are also free to pretend the bankruptcy never happened and sue you for the balances due. And given the state of the credit card industry these days, don’t count on them being so supportive.

What about converting my case to Chapter 7 to get a simple discharge of my debts? That’s also a possibility, but count on someone challenging that process since you now have the ability to pay.

And that’s why you need a really good bankruptcy attorney who can guide you through the process.

“ConnecticutGene Melchionne is a bankruptcy lawyer covering the entire State of Connecticut. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.

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