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6 Reasons To File Bankruptcy After A Mortgage Modification


Happy couple smiling in front of there houseMore and more often, our clients become interested in initiating the bankruptcy process after a successful mortgage modification. Filing for bankruptcy after obtaining a loan modification is a great strategy to tackle what is often the primary source of debt: a residential property. One of the great benefits of filing bankruptcy in this order is that bankruptcy can strip away a second mortgage; where it is often negotiated as an unsecured debt would be: for pennies on the dollar. Let’s take a look at some of the reasons for filing a bankruptcy after a loan modification:

1. Chapter 13 bankruptcy can permanently end your liability on a second mortgage.

In many cases, it’s possible for your bankruptcy attorney to negotiate a zero liability agreement with a second mortgage holder. This applies to any type of loan that uses secured property as collateral; including a home improvement loan, renovation loan, or a home equity line of credit (HELOC). There cannot be equity available to the homeowner outside of the primary mortgage.

2. Bankruptcy could lower your house payments.

A mortgage strip can take away the burden of a second mortgage by essentially reclassifying it as an unsecured loan, which can then be negotiated to be paid at a much lower amount than the balance. Often times, the homeowner will not have to pay the second mortgage after filing for Chapter 13 bankruptcy and qualifying for a mortgage strip.

3. Mortgage modification and bankruptcy have many of the same requirements.

This means that if you qualified for a loan modification, there’s a very good chance that you will be able to qualify for Chapter 13 bankruptcy. The same attributes that banks look for when approving a loan modification are also used to gauge whether an individual is qualified for filing chapter 13 bankruptcy or not. The availability of steady monthly income, a verifiable hardship, and organization of financial documents proves to the court that the individual is able to meet the demands of creditor repayment plans.

4. Credit is already impacted.

If a loan modification has already been completed, the individual is most likely aware of the effect it will have on their credit. Bankruptcy, like a loan modification, can stay on a credit report for 7-10 years. This can be one of the reasons people hesitate to file bankruptcy, but if they’ve already completed a loan modification, then their credit will be impacted for seven years regardless. In any bankruptcy case, it’s more important to get a crushing debt situation under control than to worry about the effect on credit in the short term, as a credit score is a reflection of one’s ability to obtain more credit. Obtaining more credit is not a primary concern during the bankruptcy process, as the focus is on reorganizing finances to build a strong foundation so that credit can be acquired later.

5. The bank cannot change your mortgage terms.

After your mortgage modification is approved, the bank and the homeowner have the same amount of power when it comes to changing the modification, and banks cannot arbitrarily change the terms. Banks often look favorably on individuals who file Chapter 13 bankruptcy because the mortgage debt will be regarded as a primary debt to be repaid while other debts will be relegated to a lower status, ensuring that the homeowner will be able to focus first on making mortgage payments.

6. Bankruptcy limits your liability for other debts.

The bankruptcy code and courts recognize that the idea of maintaining a homestead and shelter are critically important when an individual is utilizing bankruptcy to start over financially and free themselves from heavy debt burdens due to hardship. This is why credit cards, medical bills and even taxes are given lower priority than a residential mortgage during the bankruptcy process. These debts are usually negotiated for a very low amount as the homeowner focuses on the priority of the residential mortgage.


With comparable or lower fees than a loan modification or home refinance, Chapter 13 bankruptcy is an excellent way to capitalize on a recent mortgage modification and permanently gain control over your personal finances.

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Taking the step to file bankruptcy can be intimidating. The complicated nature of navigating the court system while obtaining all the correct financial documents and properly filing them can be discouraging. That’s why speaking with an experienced bankruptcy attorney about your specific financial scenario is crucial. With the combined experience and knowledge of dealing with thousands of individual bankruptcy cases, the Lincoln Law bankruptcy attorneys are up to the task of restructuring your debt and even wiping away a second mortgage to lighten your load. Give us a call at 800-404-0018 to set up your FREE consultation and learn more about your options.