Can a Bankruptcy Trustee Negotiate a Modified Mortgage in a Chapter 7?

by Dana W. Atchley

A bankruptcy trustee has the power to negotiate a modified mortgage for a debtor, but in a Chapter 7 bankruptcy, he'd have little incentive to do so. That's because in Chapter 7, most of the debtor’s assets are liquidated and the trustee has no interest in the debtor's future financial situation. If you’re a homeowner in Chapter 7 and can obtain a modified mortgage, you’ll certainly benefit from better terms, including reduced mortgage payments going forward. But a bankruptcy trustee represents the interests of the bankruptcy estate, not the person filing for bankruptcy. He’s obligated to recover as much as possible for the unsecured creditors who have nothing to gain from a modification of the debtor's mortgage.

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Chapter 7

In Chapter 7 bankruptcy, credit card debt and other unsecured obligations – those that are not backed by collateral such as a house or car – can be discharged by the court without further penalty. At the same time, the bankruptcy trustee may liquidate, or sell, any nonexempt assets you still have that may raise cash for the unsecured creditors. That could include your house if it’s considered nonexempt and you have enough equity in it to make the sale worthwhile for the estate. In most bankruptcies, that’s not the case. So while it’s unlikely you'd lose your house in Chapter 7, there’s no reason for the trustee to negotiate a mortgage modification for you.