Bankruptcy provides a mechanism for families to address all of their debts at once, in an orderly fashion. in both chapter 7 and chapter 13 cases, homeowners discharge most of their unsecured debts (credit cards, medical bills).
They emerge from bankruptcy with an enhanced capacity to pay secured debts, such as mortgage loans. A mortgage loan modification is more likely to succeed—benefiting homeowners and lenders—if the homeowner’s overall debt burden is reduced.
Bankruptcy can be particularly important when the home is also subject to one or more junior liens because bankruptcy allows the junior liens to be reduced, leaving more money available for payments on the first lien, and reduces the junior lien contemporaneously with the modification of the first lien mortgage, instead of after the fact, as happens with modifications outside of bankruptcy. Moreover, bankruptcy ensures that the junior liens get reduced in order of their priority, reducing the potential for junior lien holders to profit at the expense of senior lien holders. When servicers fail to process loan modifications for homeowners in bankruptcy, they undermine both the bankruptcy process and the loan modification process.
WMFA is not a law firm and our employees are not acting as attorneys. The information contained in the article is general information and should not be construed as legal advice.