I resisted answering your question earlier because frankly, I did not know if I had an answer. I handle bankruptcies, and do not represent clients in loan modifications (I honestly believe most people with a little guidance are more than capable of getting loan modifications themselves). Often, I have clients who come to me wanting to file bankruptcy, but they are in the middle of a loan modification. In reading through the papers they received when they started the loan modification, I have noticed that in many applications and "trial agreements," there is a provision in the document about bankruptcy being an event of default and my take has always been that bankruptcy would disrupt or abort entirely a loan modification.

I have recently determined that all but one of the lenders and/or mortgage servicing companies who participate in the HAMP federal loan modification program will continue to work on a loan modification even if you file bankruptcy. That being said, there are two words of caution. First, if you are getting a loan modification, remember that it may reduce your household expenses for purposes of the Means Testing, which in turn might make you not qualify for chapter 7 (assuming your income is above median). Second, if you file a chapter 13, that reduced mortgage payment will mean a higher payment to the Trustee in the case. Alternatively, if the loan modification is done after the case is filed, the change in your mortgage payment is a sufficiently large enough change of circumstances that you must modify your plan to pay in the difference in your mortgage payment. My suggestion to clients is generally this - unless it will otherwise cause you to fail the means test, get the modification done first, then file bankruptcy. You can go the other route, however, if you start the loan modification after filing, and you relied on that higher (original) loan payment to qualify for chapter 7 bankruptcy, the reduction of your loan payment post-filing might be grounds for the US Trustee to move to dismiss your case, or deny you a discharge under §707(b).

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