Modification of Mortgages through Chapter 7 in Jacksonville, FL – What’s Not to like?



Modification of Mortgages through Chapter 7 in Jacksonville, FL – What’s Not to like?

I have previously written about the mortgage modification program in Chapter 13 that was been available in the Jacksonville Division of the Bankruptcy Court for the past two years.

The program has been a great success for many homeowners who have come to our office to save their homes. Instead of having to cure many months or years of arrearages over the life of the Chapter 13 Plan, the homeowners have been able to modify the mortgages and cure the arrears over the life of the mortgage loans. The program has also lowered interest rates and allowed longer terms for mortgages in order to make payments more affordable and save homes.

 Recently, the Court expanded the program to include Chapter 7 filings to be eligible for mortgage modification relief. The announcement can be found here:

To be eligible for HAMP modification in a Chapter 7 or Chapter 13 (or even a Chapter 11 case), a homeowner must owe less than $729,750 on a one-unit property, have established the mortgage prior to January 1, 2009, and have monthly mortgage payment greater than 31 percent of his monthly gross income. Also, a homeowner must be able to provide documentation indicating that he is facing a serious financial hardship as a result of his mortgage. In house modifications have significantly broader eligibility criteria limited only by the investor for the loan.

So what is not to like about the prospect of a mortgage modification through Chapter 7? To understand the potential traps in a Chapter 7 modification program, it is necessary to understand how Chapter 7 and Chapter 13 differ.

Initially, the Chapter 7 has no Plan or payment to the mortgage company. This means that the mortgage company is receiving no potential trial payments and has no real understanding of what a homeowner considers 31% of their income – the normal trial period payment. Secondly, the Chapter 7 process is over in approximately 90 days. This means that a homeowner will lose all protection from foreclosure after 90 days when a discharge has been entered. In a Chapter 13, the stay is in effect for several months while estimated trial payments are being made to a Chapter 13 Trustee and a modification is being reviewed by the mortgage servicer. No foreclosure can commence or resume as long as the Chapter 13 payments are being made to the Trustee.

Finally, remember that modifications are voluntary. There is no forced modification under Chapters 7, 11 or 13 of the Bankruptcy Code for homestead property. If the normal modification process takes 6-9 months – what protection does a homeowner have once a Chapter 7 discharge has been entered? Mortgage companies routinely foreclose on homeowners who have modification applications pending. Just do an internet search for the horror stories related to modifications outside of bankruptcy and lost houses.

It will be interesting to see how the Chapter 7 modification process will work out over the next few months or years. My fear is that many homeowners will see Chapter 7 as an easy way to modify the mortgage on their home. This will lead to significantly lower Chapter 13 filing rates in the next few months, as home modifications are the main reason to file Chapter 13. However, will we see a great loss of homes as a result of this shift in filings? Based on past experience, I fear that will be the result.

If you are seeking to modify your home mortgage through a Chapter 7 or Chapter 13, make sure that the attorney who you are dealing with can answer the above questions regarding protection after the discharge, foreclosure during a modification and ability to save a home in default after discharge when the mortgage company refuses payments. All of these are critical to deciding if a Chapter 13 or Chapter 7 is the appropriate Chapter to file in your situation.

 If you feel that you may benefit from a loan modification or any type of mortgage relief, contact our office at 904.725.0822 for a free consultation.

Bryan Mickler