Many people come to my office holding a foreclosure and/or auction notice with a major look of disbelief on their face. The reason for this disbelief often is because they submitted all their loan modification paperwork to their lender, and having fulfilled their side (i.e. submitted everything their lender asked), assume the bank will just get back to them with an answer prior to their bank initiating any foreclosure action against them. Some of their confusion may come from the dissemination of information to the public stating no lender that received a Federal bailout can foreclose on a property while evaluating a loan modification.
However, these same Federal Laws that forbid a foreclosure auction from taking place while the loan modification evaluation is occurring, do not say the lender can not start the foreclosure process. They only say the foreclosure itself can not occur until the loan modification process is complete. Thus, if the lender denies the modification one day, it most certainly can schedule the auction for foreclosure the next, especially if the lender has been following all the statutory foreclosure rules for foreclosing all along (i.e. making publications and etc.) all along while evaluating the borrower for a modification.
The advice I therefore give is: "Mortgagor be weary." Do not throw out any documents that mention foreclosure just because you submitted your modification paperwork for review and have not heard anything. Instead, be vigilant! Go talk to an attorney as soon as possible if you have fallen behind on mortgage payments, especially if you suddenly start receiving paperwork from a law office stating it represents your lender. It may be time to look into bankruptcy and see if filing one can help you save your home.
There are no laws against working with your lender to obtain a loan modification while you are in bankruptcy. In fact, because the filing of bankruptcy stops foreclosure, provided one can keep up with the post-petition mortgage payments and trustee payments to catch up on mortgage arrearage, Bankruptcy Courts have held the lender and debtor do not need to obtain Bankruptcy Court approval for loan modifications achieved post confirmation. See In re Wofford, 449 B.R. 362 (Bankr. W.D. Wis. 2011). Further, a debtor always has the automatic right to dismiss a chapter 13. Thus, if the sole purpose of filing bankruptcy was to stop a foreclosure, one can always dismiss their bankruptcy as of right if they should obtain a loan modification pre-confirmation of the plan.
Of course, anyone making these choices must be diligent and should seek the advice of counsel first because The Bankruptcy Court can impose Rule 9001 sanctions (substantial fines) on Debtors that file bankruptcy just to delay a foreclosure. The lesson to take away from this article is to not think you have to make a choice between loan modification or bankruptcy. Sometimes, you may need to choose one over another, but at other times, your attorney may need to work on both for you at the same time in order to achieve the best result for you.
