In Chapter 13 bankruptcy, debtors are not allowed to incur new debt without the court’s permission. The loan modification process usually begins with the debtor applying for a modification with their mortgage lender. The lender will usually require them to go through a trial period, showing that they can make mortgage payments on time and in full for several months. After the trial period has concluded, the mortgage lender will evaluate the application and if the lender intends to modify the loan they will instruct the debtor to seek permission to incur new debt from the bankruptcy court.
The process for requesting relief from a court is to file a motion, which in this case would be a motion to modify a mortgage loan. These motions are usually supported by several documents, which include a copy of the loan modification agreement, bankruptcy schedules showing that the debtor’s income is sufficient to pay the payment in the loan modification, and income records proving the information in the schedules.
Whether the court will grant permission to incur new debt depends on the debtor’s ability to make payments and the reason the debtor wishes to incur the debt. In most cases loan modifications are in the best interest of the debtor. Loan modifications may reduce interest rates, lower monthly mortgage payments, and cure mortgage arrears which will allow the debtor to remove them from their Chapter 13 plan and lower their plan payment. If the benefits of the loan modification are evident from the motion and supporting documents, the court will usually grant the motion without a hearing. However, if the loan modification doesn’t make financial sense, the court may set the motion for a hearing and require the debtor to appear in court to explain why they wish to modify their loan. If the bankruptcy judge doesn’t like what he hears he may deny the motion which prevents the debtor from modifying the loan.