While personal bankruptcy is a powerful tool that can relieve tremendous financial pressure, it is not without its drawbacks. Regardless, it is often the best available solution for folks who can’t work their way out of debt by other means. As long as you can accept years of poor credit, filing for bankruptcy may be your best option for throwing the debt monkey off your back.
After filing for bankruptcy, you will have trouble securing new credit facilities like personal loans, credit cards and auto loans. You may also find it difficult to refinance existing obligations like initial mortgages and home loans. When it comes to applying for a loan modification during the bankruptcy process, timing is everything.
Before Your Filing
If you file for bankruptcy shortly after applying for a loan modification, there is a realistic possibility that your creditor will deny your application. If the modification process has already begun but remains in its trial phase, there is a smaller but still extant chance that your creditor will terminate the process and send you back to square one.
During and After Your Filing
The federal Home Affordable Modification Program, or HAMP, permits struggling homeowners to refinance their home loans and thereby remain in their homes. Recently expanded to cover most homeowners who remain employed but can no longer make their monthly mortgage payments due to reduced wages or mounting loads of debt, this well-intentioned program often brings its homeowner clients into direct conflict with their lenders.
If you apply for a HAMP home loan modification after filing for bankruptcy, make sure your attorney is aware of your action. They will need to inform the presiding judge of your action and guide you through a complex legal minefield. Once the bankruptcy process begins, the court-appointed trustee charged with overseeing your case assumes veto power over all of your credit-related decisions.
Unless you agree to “reaffirm” the loan debt canceled by your Chapter 7 bankruptcy filing, this trustee may deny your loan modification. Mortgage reaffirmation is a simple process that involves re-forming the loan agreement that existed prior to your bankruptcy filing. Although reaffirmation places you back on the hook for your loan, it also keeps you in your home temporarily and may help you to avoid foreclosure on it going forward. Be careful before reaffirming your debt in order to secure a loan modification: If you default on your debt after reaffirmation, you may be liable for additional penalties.