Homeowners, If You Are Interested in Loan Modification, Think Bankruptcy!

By Gina M. Pellegrino, Esq. and Constance d’Angelis, Esq.

We see the same story all the time with different facts. A family is behind on their mortgage payments and wants to keep their homestead property. Sometimes there are extenuating factors that contributed to the inability to make mortgage payments, such as a medical issue or job loss. What are your options? If the lender will not work with you, should you wait for them to foreclose? Is there anything you can do to be proactive? Perhaps you could keep the home if the lender would agree to lower the monthly mortgage payment amount?

For many homeowners, loan modification is a viable option in order for them to stay in their home. However, many homeowners are frustrated because they are unable to reach any resolution with the lender on their own. Perhaps you unsuccessfully tried to negotiate a loan modification and now the lender has filed a foreclosure action in court. What can you do? What some people do not realize is that they can file a bankruptcy case, then file a motion for mediation, and the bankruptcy court will enter an order requiring the lender to attend mediation, typically within 60 days, in an effort to reach a resolution.

Homestead loan modifications are available in individual Chapter 7 (liquidation of debts), Chapter 13 (debt adjustments for a person with regular income and debts within certain limits) and individual Chapter 11 (reorganization of debts) bankruptcy cases. There are a number of factors that determine an individual’s eligibility to file one of these chapters, but those factors are not addressed in this article. Once a bankruptcy case is filed, the automatic stay that is imposed in the bankruptcy case stops the foreclosure case. In other words, the lender cannot proceed with the foreclosure case without obtaining an order from the bankruptcy court granting it permission to proceed with the foreclosure. In some instances, the bankruptcy court may withhold permission to proceed until after the lender attends mediation with the homeowner.

There have been many successful loan modification mediations in bankruptcy cases. Indeed, the success rate appears to be in excess of 50 percent. However, the results are fact specific. Depending upon who the lender is, the homeowners’ income, and the past due amount on the loan, the lender may agree to reduce the principal amount of the mortgage, forbear the past due amount and add it to the end of the loan, reduce the interest rate, and/or waive fees and costs. Sometimes, if modification is not a workable option, the result is “Cash for Keys,” in which the lender takes title to the property and provides the homeowners with money to move.

If the loan modification is successful, all parties involved benefit: the homeowners are allowed to stay in their home and have a monthly mortgage payment that they can afford, the lender has a performing loan, the neighborhood does not have a foreclosed property decreasing the value of the neighboring properties, and the real estate market maintains some stability.

If you are a homeowner, interested in a loan modification for your homestead property, you may consider contacting an attorney to discuss your bankruptcy alternatives and whether loan modification mediation in a bankruptcy case may be a possible option for you. In addition, for information about bankruptcy in general, you may visit the bankruptcy court’s website, http://www.flmb.uscourts.gov/.

This article is intended only as a starting point with respect to discussing loan modification mediations in bankruptcy cases. It is beyond the scope of this article to provide an exhaustive discussion of all options available to homeowners, including but not limited to the various government and lender programs offered. This article does not constitute a legal opinion and is not intended to provide any legal advice. It is for informational purposes only. For legal advice specific to your situation, an attorney should be consulted.

Gina M. Pellegrino, Esq. is a Partner at Iurillo Law Group, P.A., located in St. Petersburg, Florida. The primary areas of practice of Iurillo Law Group, P.A. are Bankruptcy, Debtors’ and Creditors’ Rights, Bankruptcy Litigation, Business Law, Business Litigation and Real Estate Law.

Constance d’Angelis, Esq. is a bankruptcy attorney and a Mortgage Mediator, approved by the U.S. Bankruptcy Court, Middle District of Florida, who mediates the modification of residential mortgages in bankruptcy proceedings. Ms. d’Angelis is also an author of “Modifying Residential Mortgages in Bankruptcy”, available at CLEanytime.com and a regular speaker at continuing legal/mediation education courses.

This article is freely available for reprint, provided the resource boxes are included.