Bankruptcy Law/Modificaion after Chapter 7
QUESTION: In California. I am working on getting a loan modification for my residence. This debt and other debts were discharged in my Chapter 7 of three years ago. The loan is in my name only.
My wife got her Chap 7 discharge two years before my discharge. Her other rental home and credit cards were in her name.
Because of loss of jobs and increasing monthly payments I decided on the modification to reduce
the loan payments. Will my acceptance in getting the loan modification, cause me to lose my Chapter 7 protection? I worry that if accept the modification and one day the underwater property gets foreclosed on, the lender could come after me or my wife for any shortfall from the foreclosure sale.
ANSWER: You should be ok here unless you cranked a lot of money out of the house then refinanced then modified the re-fi; there is some question in CA whether a residential loan that is part purchase money and part cranked out equity is fully exempt from deficiency actions. In order to get a deficiency judgment the lender has to judicially foreclose, that is, go to court etc which is why 99% of the time they do the non-judicial route -- file a notice of default, 3 months later record a notice of trustee's sale and 3 weeks after that have a foreclosure sale.
After that you as the buyer have no rights, however with a judicial foreclosure there is a redemption period; I'm not sure what it is but I believe it's at least 90 days to pay the loan off and "redeem" the property -- another reason (other than the expense) why lenders don't typically go the judicial route.
I'd go ahead with the modification. Whatever liability that was discharged would be revived but generally you had no liability to discharge in the first place.
---------- FOLLOW-UP ----------
QUESTION: I would like to provide more precise facts regarding my present intention in getting a loan modification for the Chapter 7 discharged rental property of several years ago.
Yes, I had previously refinanced the property three times, and took cash out during the last 20 years I've had the rental property but before the Chapter 7 discharge. I had never modified the loan before I had my Chapter 7 discharge. My Bankruptcy attorney said that all loan debt, including delinquent payments, and penalties added on top would be discharged. And that I would have no personal liability if the property were ever foreclosed on .
Now based on all the foregoing, if I accept my first loan modification, will I lose my Chapter 7 discharge protection?
Also, My wife was never on any loan papers and I don't want the lender to go after her in a future foreclosure sale deficiency, because they could not go after me.
ANSWER: It's best to get back with your attorney on this modification/debt revival question. I don't think you'd have liability but with having cranked cash out that may be different. Is the loan mod a really good deal? Are they forgiving any debt? Remember if they're writing off part of the debt, now, there may be tax consequences with 1099 being received for this (back-door income so to speak).
In Calif both spouses must join on any real estate transaction, sale, mortgage for example; I'm not sure they have the right to go after anyone for a deficiency but ask your bankruptcy lawyer for a second opinion -- if that changes after a loan mod.
---------- FOLLOW-UP ----------
QUESTION: I remember asking my Chap 7 attorney about previous refinances. He said that the debt would be discharged, regardless of any previous refinances with cash out.
What he mentioned was that for any depreciation I had accumulated yes I would owe taxes on it, but that I see my tax expert, which I did. The tax expert said I would owe taxes for the depreciation, with other exceptions such as insolvency.
I would also owe capital gains tax should a foreclosure sale, sell more than the total debt. But the property is presently 40% underwater. Anyway I will, ask my Attorney on whether I would keep my Chap 7 protection .
Good idea. I would guess the bank isn't going to modify the principal downward -- just jigger with the interest rate and / or payments for a short while. With property that far underwater it might make sense to just quit paying & let it go back to the bank rather than modify -- but that's your call.
If they'll lop off 40% of the principal, which I've never seen a bank do yet, then that would be a good thing to consider in the modification arena. Otherwise I'd pass.