I just heard a sad story from a lady who took some really bad advice.
The advice came from a loan modification agent.
And, as a result of that advice, she is now going to lose her home to foreclosure.
Her facts are similar to those of many of my clients, so I share it with you here so you may avoid her fate.
People often seek loan modifications when they are facing foreclosure due to missed mortgage payments.
A loan modification, if approved, will revise your existing loan agreement to bring the loan current (take it out of default).
And, usually it will lower your monthly payments by lowering the interest rate, extending the loan term, or by other means.
Banks Do Not Always Approve Loan Modifications Before Foreclosure Sales
So, loan modifications are great, if you can get it approved.
But while you are going through the loan modification process, which can take several months, your bank may not stop the foreclosure process and you may be faced with a sale date.
Or, even more common, the loan modification gets denied a couple of days prior to the foreclosure sale date.
Filing bankruptcy will stop the foreclosure sale, at least temporarily.
How Bad Advice On Bankruptcy From A Loan Modification Agent Cost This Woman Her Home
This is where things went horribly wrong for the woman referenced above. She was faced with several sale dates while her various loan modification applications were submitted, then denied.
So her agent, the so-called loan modification specialist, advised her to file a Chapter 13 bankruptcy case.
Now that might have actually been good advice (which I explain more below), except that the agent also advised her to simply dismiss the case (which is allowed) shortly after filing once a new loan modification application was submitted. The agent then repeated this “advice” for a second bankruptcy filing. The agent, of course, did not explain the requirements of Chapter 13, the benefits, costs, risks, or anything else (because the agent was not a bankruptcy attorney).
So this woman filed two Chapter 13 cases which were dismissed in a 12-month period, and had yet another loan modification denied, at which point she contacted me.
The Bankruptcy Code Imposes Penalties For Multiple Dismissals Within 12-months
I then had the dubious honor of explaining to her that the Bankruptcy Laws state that if you have more than one case dismissed in a 12-month period, the next case you file will not have the protections of the automatic stay, which is what prevents creditors from taking actions against you such as foreclosing.
On top of that, even if the automatic stay was in effect, the past due amount on the mortgage loan was more than she could catch up on with her current income. Had she properly followed through with her original Chapter 13 case, she would have been fine.
In other words, filing another Chapter 13 case now would be of no benefit to her because the bank could still proceed with its foreclosure. She could wait until it has been more than a year since her prior case dismissal, but the house would be sold by then. The bankruptcy court can impose a stay upon request, but it is rarely granted under these facts and, in any event, there’s no guarantee it could be obtained prior to the sale taking place.
How Chapter 13 Could Have Saved Our Damsel
Here’s what our misinformed borrower should have done:
Before, or at the same time as applying for her first loan modification, she should have consulted with an experienced bankruptcy attorney.
A bankruptcy attorney would have advised her that if she filed Chapter 13 she could have:
- Proposed an easy, affordable repayment plan to catch up on the defaulted amount over 60 months;
- Eliminated other unsecured debts she may have had;
- Continued the loan modification process with her bank without fear of foreclosure.
In short, if she had properly followed through with her original Chapter 13 case, she could have still pursued the loan modification. Once received, she could either dismiss her Chapter 13 case then or continue to get the benefit of a discharge of debts.
For more about how Chapter 13 can help with loan modifications, see https://www.bklaw.com/bankruptcy-blog/2015/11/loan-modifications-and-chapter-13-bankruptcy/
JD Hancock is responsible for the image in this article.