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Sunday, June 27, 2010

Combining Chapter 13 with a Voluntary Mortgage Modification

Combining Chapter 13 with a Voluntary Mortgage Modification


Most of us are all too familiar with the failure of Congress to pass legislation allowing judicial modification of mortgages in chapter 13 bankruptcy cases. Sadly, our predictions of millions of foreclosures, most of which could have been prevented by that legislation, are coming true, and most knowledgeable observers believe the worst is yet to come. In the absence of a law requiring lenders to modify mortgages, creative bankruptcy attorneys have been doing the best they can with the tools that are available and are having considerable success. 
Increasingly, consumer bankruptcy attorneys are combining loan modifications under the Obama Administration's HAMP (Home Affordable Modification Program) with chapter 13 plans that can eliminate or greatly reduce most other debts. In some cases second and third mortgages can even be eliminated in chapter 13. This strategy was made much more feasible by recent changes in the mortgage modification program directives that prohibit mortgage companies from discriminating against homeowners who are in bankruptcy cases.  It also provides a mechanism for attorneys to be paid for loan modification work (as part of the compensation for chapter 13 representation paid through a chapter 13 plan) without requiring large up-front payments.
It is sometimes possible to obtain a loan modification before filing a bankruptcy case and then file the bankruptcy, under chapter 7 or chapter 13, to deal with other debts.  But bankruptcy attorneys have also had success with submitting a loan modification request after a chapter 13 bankruptcy case has been filed, and incorporating the proposed modification into a  chapter 13 plan to be approved by the court once the mortgage company agrees to modification.
Some bankruptcy courts, such as S.D.NY. and Rhode Island, have also begun mediation programs to help homeowners come to agreement with mortgage holders on loan modifications.  A strong mediation program can ensure that homeowners are dealing with someone who has the authority to make a deal and can hold servicers accountable, preventing the “lost document” problems and other problems frequently encountered by consumers attempting to get modifications.  Courts can hold lenders' feet to the fire by refusing to permit them to foreclose if they do not make a good faith effort to achieve a workable modification.       Of course, voluntary mortgage modifications, especially the vast majority that do not reduce principal, are not as effective in the long term as the restructuring that chapter 13 provides for all other kinds of secured debts. But being able to obtain both an affordable mortgage payment through a loan modification, as well as relief from other debts, gives consumers the best chance under current law to keep their homes and get a financial fresh start.  It should greatly ameliorate the problem of the high debt to income ratios that are causing some homeowners who have received modifications to default, even with their lower mortgage payments.

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