Loan Mod in Bankruptcy

If your home mortgage payments are so high that you cannot afford to keep your home, you can try to ask your lender to modify your loan.  Colloquially, this is referred to as asking your lender for a “loan mod,” which is short for what your bankruptcy lawyer would more likely refer to as a modification or restructuring of your mortgage loan.  You must request a loan mod by applying through your lender or loan servicer, or, in San Diego, it is common to have your attorney or real estate professional submit an application on your behalf.

Can I do a Loan Modification In Bankruptcy In San Diego?

It’s a question I am frequently asked by clients who are about to file bankruptcy: Can I do a loan modification in bankruptcy in San Diego?  Whether you can successfully complete the loan mod process in bankruptcy in San Diego, depends on several factors, such as your monthly income and expenses, your lender’s desire (or lack thereof) to grant you a modification or restructuring of your loan, and the type of case that you file, specifically, Chapter 7 versus Chapter 13.

Income and Expenses

Your monthly income and expenses are one of the biggest factors in your lender’s determination as to whether to go through the time and expense of modifying your loan. If you don’t have sufficient income to make even a modified payment under the debt-to-income (DTI) ratio used by your lender, then it will be a waste of both your lender’s time and your time for your lender to go through the effort of giving you a loan mod.   Similarly, if your expenses exceed your income such that you cannot afford even a modified mortgage payment and all of your other expenses, then it will not make sense for your lender to spend the time to modify your loan.

Your Lender’s Discretion

Perhaps the biggest factor in determining whether you get a loan mod is your lender’s discretion.  Despite what many people may tell you, the plain fact is: you cannot force the loan mod process absent your lender's willingness to work with you.  If your lender want’s to modify your loan, it will.  If it doesn’t, it won’t and there is nobody that can force it to modify your mortgage.  If you’ve been denied, you can try to submit and resubmit your loan modification application a dozen times, and your lender’s answer will still be “no.”  Often, a “no” suggests that there is an investor that simply does not want to modify your loan.   Many times, the denial may reflect your lender’s desire to clean up its loan portfolio, so that it has fewer defaulted loans and therefor looks more attractive to potential investors.

Loan Mod in Chapter 7

If you are in a Chapter 7 case, your lender might decide to modify your loan.  You will have to submit an application according to the lender's specifications either before your case is filed or during the pendency of your case.  Your lender may tentatively grant your loan modification request while you are in bankruptcy and then finalize the documents the moment your Chapter 7 or Chapter 13 case is completed.  During your bankruptcy, your attorney should review the loan modification documents with you to ensure that all of your rights and interests are protected. 

Chapter 7 Can Help Modification

A Chapter 7 filing can actually increase your chances of obtaining a loan modification because you can eliminate your credit card debts and associated payments, so that your monthly expenses no longer exceed your monthly income.  Lenders will often tell customers that if they file Chapter 7 bankruptcy in San Diego, then they may have a better chance of obtaining a modification.  I have had many clients whose lenders told them to file bankruptcy to increase their chances of obtaining a loan mod, then I filed their bankruptcy, and then they received a modification.  Some lenders will want you to wait until your Chapter 7 proceeding is completed before they proceed with their application.  Each lender is different, and the lenders change their procedures regularly. You will have to consult with your lender to see what its current position is on modifying loans during Chapter 7, and discuss this fully with your San Diego bankruptcy attorney.

Loan Mod in Chapter 13

If you are in a Chapter 13 bankruptcy in San Diego, it is usually less likely that you will be able to modify your loan.  The reason: in your Chapter 13 case, your bankruptcy lawyer will file a Chapter 13 plan for you, in which you must agree to resume making you regular monthly mortgage payments and make a separate payment to the court to repay all of your pre-bankruptcy mortgage arrears (payments you had missed).   So your lender has little incentive to modify your loan.  It can just back and watch you pay your payments as well as the arrears, all as a mandatory condition of your Chapter 13 proceeding.