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Some Florida residents may wonder whether they should seek or agree to a loan modification on their home mortgage if they are currently involved in a Chapter 13 bankruptcy. To answer that, it is important to understand how a bankruptcy works.

In a Chapter 13 bankruptcy, the judge appoints a trustee to oversee the case. That trustee takes money each month in accordance with an established budget and uses those funds to pay creditors. Any time a person’s income or expenses change, the budget may also change. Typically, the purpose of a loan modification is to reduce the monthly loan payment. However, when a person is going through a Chapter 13 bankruptcy, those funds will not be immediately available. The difference between the old and new payments can be taken to pay other debts under the bankruptcy plan. It may take three to five years for a bankruptcy to be completed.

Because lower payments can impact the bankruptcy, it may be necessary for a judge to approve a loan modification before it can be completed. The lender may also impose other conditions, however, it has become easier for home owners to get a loan modification in recent years than it was during the height of the mortgage crisis. If the modification is approved by the judge and all conditions are met, modifying before the bankruptcy is complete can lead to additional cash after the bankruptcy ends.

When debts mount, it can be overwhelming to try to make ends meet. Bankruptcy may seem like complicated process. However, it doesn’t have to be. A local attorney may be able to assist with choosing the right type of bankruptcy, establishing a budget and filing paperwork to simplify the process.

Source: Fox Business, “Should I Take Loan Modification While in Chapter 13?”, Justin Harelik, July 24, 2013