When the 2008 economic recession hit, mortgage companies were forced to find a solution for homeowners who could no longer afford their house payments and had fallen behind. Otherwise, the number of foreclosures would have been far more astronomical than it already was. Mortgagers would have lost millions of dollars.
A Chapter 7 bankruptcy debtor has the option of reaffirming debt on assets which he or she would like to keep. This means that the debt would continue being paid by the debtor after bankruptcy discharge. However, in order for a debt to be reaffirmed, the payments must be completely current at the time the Reaffirmation Agreement is signed. Oftentimes, once they reach the point of filing bankruptcy, debtors are already far behind on mortgage payments and do not have the funds to bring them current.
Mortgage companies can allow a debtor to apply for loan modification at their discretion, depending on their determined requirements. The difference in a modification and a refinance is that a refinance creates a whole new loan that can have a different interest rate or term. A modification simply changes the term of the loan while all other factors stay the same. By extending the term, the monthly payment can be brought current and reduced going forward.
Ask your bankruptcy attorney if you are a candidate for mortgage loan modification if you would like to keep your home. Since the beginning of the Home Affordable Mortgage Program, banks and lenders have greatly improved the application and approval process.
Source: The Balance, “Mortgage Loan Modification and Bankruptcy,” Carron Armstrong, Oct. 17, 2016