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.

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.

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.

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What If I Sold My Home Before Deciding to File Chapter 13?

References

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Bankruptcy Laws Regarding Mortgage

Bankruptcy allows debtors to get some relief from a debt load they cannot otherwise overcome, but it doesn't always allow them to keep their assets. Mortgage lenders have rights even while the homeowner is going through bankruptcy. Depending on the type of bankruptcy a debtor files and how much equity he has in his home, he may lose his home during the bankruptcy process.

What Happens to a Home When One Files Bankruptcy?

When a homeowner files for bankruptcy, one of the primary considerations often on his mind is whether he can keep his home, or whether it must be surrendered to satisfy debts. A debtor filing personal bankruptcy under Chapter 7 or Chapter 13 might be able to keep his home, depending on how much equity he has in the house and whether he can maintain the mortgage, property tax and homeowners insurance payments.

Does the Bankruptcy Court Allow You to Pay Outside the Chapter 13 Plan?

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