Can I Modify My Mortgage in a Chapter 7 Bankruptcy?

When filing bankruptcy in Florida, you will have many questions. One of the most common questions our Fort Lauderdale bankruptcy lawyers here is whether or not they can save their homes when filing Chapter 7 bankruptcy. While you can save your property when filing Chapter 13 bankruptcy, Chapter 7 bankruptcy does not provide such a mechanism. Still, you can file Chapter 7 and then approach your lender with a request for a loan modification, sometimes referred to as a workout.

Still, whether or not you are given a modification is entirely at the discretion of the lender. Even if they agree, you will also still likely have to wait until the lender determines that the bankruptcy trustee will not sell the home to distribute the proceeds of the sale to your creditors.

Control of Your Home when Filing Bankruptcy

The typical Chapter 7 bankruptcy case takes approximately four to six months before it is finalized. In the best of cases, this means that your debt has been discharged and you will no longer be responsible for those debts. As you move through your case, your property is moved over into the bankruptcy estate. You can still access your property during this time, and you will also retain control over it. However, you will share these rights with the bankruptcy trustee that oversees your case. The court will appoint the bankruptcy trustee at the beginning of your case and you will work closely with them throughout the entire process.

Your Property and the Bankruptcy Trustee

Once your home becomes part of the bankruptcy estate, you are prohibited from taking certain actions. For example, you cannot try to sell the home or encumber it in any way, which includes requesting a loan modification from your lender. The only way you can do this is with permission from the court. The reason you cannot take action is because the bankruptcy trustee has to determine whether the creditors you owe money to have a claim over the property or any proceeds from its sale.

There is a chance that the bankruptcy trustee will abandon your property. When they do this, they have determined that the home will not benefit the estate and essentially, that it cannot be liquidated to distribute the proceeds to your creditors. If the trustee decides that abandoning the property is the best decision, they will file a notice with the court. This notice will release control of the home from the bankruptcy trustee and the property will return to your control. If the case is not very complex, the trustee will attest at the 341 meeting of the creditors that your case is one that does not involve any assets.

A 341 meeting of the creditors is a meeting in which you will meet with your creditors and the bankruptcy trustee. During this meeting, the creditors you owe money to will have a chance to ask you questions, which you must answer under oath. The questions will pertain to your assets, debts, and anything else relevant to your bankruptcy case. If the bankruptcy trustee has deemed that your case is one that does not involve assets, they will file a no-asset report with the bankruptcy court after the 341 meeting.

There is a possibility that the bankruptcy trustee will not abandon your property. If this is the case, it is likely due to the fact that the home still has value that cannot be protected with a bankruptcy exemption. When this is the case, the bankruptcy trustee can use any assets that are non-exempt to pay your creditors. Anyone who files for bankruptcy can exempt certain assets, such as your home, from the bankruptcy process. In reference to a home, you can generally protect up to a certain value using an exemption.

The value that can be protected in a bankruptcy state varies from state to state. In Florida, the homestead exemption protects a residence if it is the primary residence of a borrower, and the homeowner has lived in the home for 40 months or more, and the property is smaller than one-half acre in a municipality, or smaller than 160 acres elsewhere.

If your home has more equity in it than you can exempt, or the property is otherwise ineligible, such as being larger than one-half acre, the bankruptcy trustee may decide to sell it so the proceeds can be used to pay your creditors. Before the home can be sold though, the bankruptcy trustee will have to repay the balance of the mortgage, cover the cost of the sale, and their own commission. The bankruptcy trustee must also provide you with the value you are allowed to exempt.

Obtaining a Loan Modification

Bankruptcy trustees need a lot of time to evaluate the situation and go through the complex process of selling the homestead. During the time in which the bankruptcy trustee is making this decision, you can approach your lender and ask them to modify the mortgage loan. The lender may even contact your lawyer in writing inviting you to do this.

If the bank approves the loan modification request, and the bankruptcy trustee has not yet abandoned the home, you will need to take one of two actions. You will either need to file a motion with the bankruptcy court asking them to approve the loan modification, or you will have to contact the bankruptcy trustee and ask them to file notice that they are abandoning the property.

Our Bankruptcy Lawyer in Fort Lauderdale Can Assist with Your Case

Bankruptcy will offer you a chance at a fresh start, but the process is a complex one.  At Loan Lawyers, a Fort Lauderdale bankruptcy lawyer can help you through the process, explore loan modification, answer all of your questions, and give you the best chance of a positive outcome. Call us today at (954) 523-4357 or contact us online to schedule a free consultation and to learn more about how we can help.