Bankruptcy and Mortgage Modification

Generally, the bankruptcy code does not allow a consumer to use bankruptcy to force a bank to modify her home mortgage. However, at this time, consumers filing chapter 13 in Northern California bankruptcy courts located in Oakland, San Jose, Salinas, Santa Rosa, or San Francisco can ask their mortgage lender for a mortgage modification. While the modification is pending, the consumers can propose a chapter 13 plan where they pay 31% of their gross income towards their housing cost. While the mortgage modification is being evaluated, and while the consumer is paying 31% of her income towards housing expenses, and while the bankruptcy case is active, the consumer can keep her house.

The bankruptcy court will not order the bank to modify the consumer's home mortgage. However, the court may protect the home from foreclosure while the mortgage modification is being evaluated.

Because the Northern District courts offer this program, we encourage debtors to obtain bankruptcy protection as soon as they consider mortgage modification. Moving quickly to obtain bankruptcy protection has several advantages:

Because debtor is in bankruptcy protection, their bank may disregard his consumer debt burden in evaluating the debtor's ability to qualify for modification.

Because the debtor is in bankruptcy protection, he does not need to worry about his lender accidentally foreclosing his home. Unfortunately, there are many instances of banks accidentally foreclosing homes even though the debtor was being evaluated for modification.

If the debtor is smart enough to obtain bankruptcy protection before seeking mortgage modification, even if the mortgage modification is later denied, the debtor will be able to use the protections of bankruptcy law to stay in his house for at least five months from the date of denial.

On the other hand, if a homeowner files bankruptcy after the mortgage company records a Notice of Default in the county recorder's office, the bankruptcy protection will be drastically reduced. In fact, the mortgage lender may be able to hold a foreclosure auction within four weeks of denying the modification.

Because the debtor is in bankruptcy protection, he does not have to worry about collection activity, wage garnishment, bank levies, lawsuits, and other harassment from other creditors.

For these reasons, we believe homeowners in Del Norte, Humboldt, Mendocino, Lake, Napa, Sonoma, Marin, San Francisco, Contra Costa, Alameda, Santa Cruz, Santa Clara, San Benito, and Monterey counties should seek bankruptcy protection before seeking mortgage modification.

Unfortunately, other courts do not have this policy. Therefore debtors who file for chapter 13 bankruptcy in Sacramento, Modesto, Bakersfield, and Fresno, cannot invoke protection against foreclosure by proposing to pay 31% of their income towards housing expenses. In those courts, debtors who wish to keep their home must pay their regular mortgage payments, at least for the first mortgage. Furthermore, if the debtors are behind on their mortgage, they must propose a plan to catch up or "cure" within five years.

Beware of Mortgage Modification scams

California laws enacted after the real estate downturn now makes it illegal for anyone, including attorneys or real estate professionals, to charge money upfront for mortgage modification services. This means that any legitimate mortgage modification service must complete all services before charging any money. If you are approached by any person or organization that promises to help you modify your mortgage, and demands money upfront, BEWARE! It doesn't matter how they charge the money. Whether they call it "document review fee" or "forensic examination fee" or "Mortgage Modification qualification evaluation," what they are proposing to do is against the law. Anyone who is prepared to openly break the law cannot be trusted to provide quality service.

Additionally, California law makes it illegal to break down the service into parts, in order to collect money piecemeal. Therefore, if anyone charges separately for "document preparation" and "lender communication" their conduct is probably also illegal.

Reputable mortgage modification service providers will not charge you anything until after all work is completed.

By Sam Taherian

Seeking to assist individuals and families throughout Northern California, Sam Taherian is highly knowledgeable when it comes to pursuing bankruptcy. Handling everything from Chapter 7 filings to Chapter 11 and everything in between, contact our office no matter what financial crisis you may be experiencing. He is on the Board of Directors for a non-profit public service group called the Bay Area Bankruptcy Forum and is committed to providing help when you need it most.