Keeping the House

• Debtors must make sure they can keep their house if they plan to modify a mortgage. In a Chapter 7, the court has the ability to sell the house to pay off mortgages. Different states have different exemption laws regarding the amount of property value that is exempt from this action, so borrowers must consult local laws to determine whether they are in danger of losing their house. If the homeowner loses the house through a Chapter 7 bankruptcy, the mortgage will be paid off, at least in part, and discharged, and a modification will not be possible.
  
  

Reaffirming Debt

• In many cases, debtors can keep their houses, even during a Chapter 7 bankruptcy. If this is the case, the borrower can take steps during the bankruptcy to keep the mortgage and prevent the lender from accelerating the debt or taking another drastic action. This is called reaffirming the debt. The debtor sends a letter to the lender stating that the debtor will continue making mortgage payments throughout the Chapter 7 in an effort to keep the loan current, or at least provide a sign of good faith.
  
  

Modifying Mortgages

• The bankruptcy court does not have the ability to modify the mortgage directly -- at least not yet. In 2011, legislation was being considered that might allow bankruptcy courts to modify mortgages in a Chapter 7, but, as of May 2011, it has not been passed. As a result, a debtor's only option to modify the mortgage is to contact the lender and negotiate a change in the loan terms. Lenders have the ability to modify their mortgages in a variety of ways, including changes to late payments and interest rates.
  
  

Lender Decisions

• Lenders often prefer to modify mortgages to avoid the hassle of a foreclosure. However, a Chapter 7 bankruptcy may cause lenders to be reluctant to change the loan terms. Lenders may believe a home will be taken during a Chapter 7 anyway or that the bankruptcy is a sign of the debtor's inability to make future payments on the mortgage. Therefore, the lender may refuse to agree to a modification even if it is possible.