Unlike a Chapter 13 bankruptcy, Chapter 7 bankruptcy doesn’t have a mechanism that will help you save a house when you’re behind on your payments. However, if, after you file for Chapter 7 bankruptcy, your lender agrees to a loan modification (often called a workout), there's nothing in the law stopping you from modifying the loan. But, it will be entirely at your bank’s discretion, and your lender will likely want you to wait until it’s clear that your trustee has no interest in selling the property for the benefit of your creditors.
If you’re a typical Chapter 7 bankruptcy debtor (filer), your case will last four to six months from the date you file until you receive your discharge. During that time, all of your property goes into the bankruptcy estate. You’ll still have access and control over your property, but you’ll share that control with the bankruptcy trustee appointed by the court to oversee your case.
While the house is part of the bankruptcy estate, you can’t take any action to sell or encumber it, including modifying the mortgage, without court permission. That’s because the trustee must have time to determine whether the creditors are entitled to have your property sold and the proceeds distributed amongst them.
The decision to sell the homestead is a serious and sometimes complicated decision that might take some time for the trustee to evaluate. In the meantime, you can apply to your mortgage lender to modify the mortgage (your bank might send a letter to your attorney inviting you to do so). If the lender agrees to the modification, and the trustee hasn’t abandoned the property yet, you’ll need to do one of two things:
But there won’t be any point in applying if the trustee decides to sell the property. Therefore, don’t be surprised if the lender won’t take any action on the modification until it's clear that the trustee will abandon the property.
If you’re in danger of losing your home because you’re behind on your payments and need to catch up, or you have a lot of nonexempt equity that a Chapter 7 trustee could use to pay your debts, you might consider filing a Chapter 13 case instead. If you file for Chapter 13 bankruptcy, you can keep your property even if you have nonexempt equity. You’ll pay some portion of your debt through a payment plan that will last from three to five years. You can modify your mortgage while you’re in a Chapter 13 case, as well.