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Loan Modifications in Bankruptcy  The Wild West Comes to Court

The process of loan modification closely resembles the Wild West.� There s a sheriff in town, but he s likely hiding behind an overturned stagecoach when the real shooting begins.� For the myriad of people engaged in discussions, discussions and more discussions with their lenders, it s hard to get the timing of the loan modification and bankruptcy in sync.

Ideally a loan modification should be complete before filing either Chapter 7 or Chapter 13 bankruptcy, but when stuck in endless rounds of paperwork coupled with the glacial pace of most banks, often the bankruptcy becomes pressing as other creditors actively pursue lawsuits, wage garnishments and liens.

Have no fear, there s a new sheriff in town.� If you ve filed bankruptcy, all is not lost on the loan modification front.� You are still free to enter into an agreement with your mortgage company as your bankruptcy progresses to discharge. (*specific Chapter 13 information).

More good news from the land of tumbleweeds; all is not lost if the bankruptcy is completed before the loan modification.� Once on the other side of bankruptcy, armed with a discharge of your debts, your debt to income ratio for the purposes of determining whether you qualify for a loan modification is much improved.� Many Los Angeles and Orange County bankruptcy clients find they get more favorable loan modifications after the bankruptcy than were in the works before.

* In a Chapter 13, once a loan modification is negotiated, it must be approved by the court and the Chapter 13 Trustee. �The Trustee may demand that if the loan modification results in a lower payment, that difference be added into the Chapter 13 plan payment as excess income.�� The Trustee may reject the loan modification if it would increase the monthly mortgage payment and debtors wish to lower their plan payment to make the payments (which, from the Trustee s point of view leaves less for unsecured creditors like credit cards).

Note that the above does not apply to instances where the creditor of a property has been granted relief from the automatic stay by the court.� In those instances, the property is removed from the bankruptcy estate.� This usually occurs when the debtors have defaulted on a mortgage payment after the bankruptcy has been filed.� With the estate removed from bankruptcy, some mortgage creditors have expressed willingness to work out some arrangement outside the bankruptcy court if they believe the default is not a future concern.

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