When someone files for Chapter 13 bankruptcy in Phoenix, they might wonder if they should seek a loan modification, especially if they are offered a low interest rate. While lenders infrequently approved loan modifications between 2008 and 2011, consumers filed Chapter 13 bankruptcy in order to catch up on their house payments. However, many of these people couldn’t keep up with the bankruptcy payments and the mortgage, so they lost their home in addition to taking a hit on their bankruptcy.

The purpose of Chapter 13 is to repay debt over three to five years. A trustee will look over the case, set up a payment plan and send money to creditors. Mortgage holders have seemed to ease up on loan modifications and have been approving them more often.  Consumers can also rid themselves of a second mortgage through Chapter 13, but this can be complex and not every second mortgage may qualify to be eliminated through a Chapter 13.

A modification can lower payments and help a homeowner’s cash flow once they finish their bankruptcy case. A lender will outline specific requirements, such as court approval, that the homeowner will need to meet prior to granting the modification. While not all judges enforce this requirement, lenders sometimes hesitate to grant one without the court’s agreement. Since the mortgage payment will drop, the trustee will most likely insist that the homeowner simply apply the extra money toward other creditors. However, the advantage of lower house payments after the Chapter 13 is complete makes the loan modification a good idea.

When someone files a Chapter 13 bankruptcy, they could benefit from a loan modification.  Contact an Arizona bankruptcy attorney today to see if Chapter 13 bankruptcy is an option for you and whether or not you could also benefit from a home loan modification.

Source: Fox Business, “Should I Take Loan Modification While in Chapter 13?”, Justin Harelik, July 24, 2013