I have found that it doesn't matter a whole
lot which order you do those things in, though there are some differences:
If you decide to file Chapter 13 first (not Chapter 7
- you can't
strip a junior mortgage in Chapter 7) and strip the second mortgage, then you can begin the modification process on the home during the Chapter 13 case (which lasts from 3 to 5 years). Since you are trying to modify during a bankruptcy case, you may have access to special programs that resulted from the lawsuit settlement that was entered in February 2012 and approved by the Court in April 2012 IF
you are modifying with one of the "big 5" lenders who were defendants in that lawsuit (Citi, GMAC, JPMorgan Chase, Wells Fargo, or Bank of America). This lawsuit was called the Homeowners in Bankruptcy Relief Plan. Essentially, on February 9, 2012, the U.S. Attorney General announced that it and 49 states had reached a settlement with the nation's 5 largest mortgage servicers to resolve mortgage servicing, foreclosure, and bankruptcy abuses allegedly perpetrated by those servicers. On April 5, 2012, the settlement was approved by the U.S. District Court for D.C. The banks are required to spend at least $17 billion on various forms of relief for homeowners. Homeowners may be eligible for modification, forbearance or forgiveness of principal, short sale, waiver of deficiency balance, and other relief.
So, if you're dealing with one of the mortgage servicers below, after your bankruptcy is filed you can call the corresponding phone number to try to get something worked out:
Bank of America(NNN) NNN-NNNN/p>
Wells Fargo(NNN) NNN-NNNN/p>
See also http://nationalmortgagesettlement.com/
Believe it or not, this does seem to be working. GMAC contacted me a few weeks ago (THEY contacted ME) and asked to reduce a Chapter 13 client's second mortgage balance from $94,000 to $67,000 principal and reduce the interest rate from 9.X% to 3.X% in a NON-strippable situation. I said "Uh... where do we sign?" We signed the "Non-HAMP Mortgage Modification" form they faxed me, and I filed a Motion to XXXXX with the court, seeking court approval of the agreement (which we got).
However, a drawback of filing the bankruptcy before modifying the mortgage is that your Chapter 13 Plan payment amount may go up. The Plan payment is based on how much you can afford, so you put in your take-home income from ALL sources (Schedule I) and reasonable monthly expenses (Schedule J), then your Plan payment is whatever the difference is (called your "disposable income"). So, if your take-home income is $3,000/mo and your monthly expenses are $2,500/mo, then your Plan payment will be $500/month.
So, let's say when you file your case you leave your second mortgage off of your expenses since you intend to strip it, and let's say your first mortgage is $450/month, and it is on your expense list since you have to keep the first mortgage to keep the home. Let's also say your disposable income is $500/mo, so your Plan payment is $500/month. If you modify the first mortgage after the case is filed, then let's say the first mortgage payments drops to $300/month as a result of the modification (a $150 drop from the original mortgage payment amount). Now, your disposable income will go up by $150 since your first mortgage payment dropped by $150, so your Chapter 13 Plan payment will go up from $500/month to $650/month. But, if you had modified before the case was filed, you might have been able to use that extra $150/month to go buy better health insurance (or get some other allowable expense) and then filed the bankruptcy and still only had a $500/month Chapter 13 Plan payment (if that makes sense).
So, modifying after bankruptcy may allow you to have access to much better modification programs, but modifying before lets the dust settle so you can better predict and control how much your Chapter 13 Plan payment will be.
When all the factors are weighed in, most of my clients file the bankruptcy first and then do the modification and let the chips fall where they may as far as the Chapter 13 Plan payment amount is concerned, but certainly both ways have advantages and disadvantages so you need to decide what works best for you.
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