Trustee Blog

Loan Modifications and Bankruptcy Trustees

Posted by:

Chapter 7 Riverside Trustee Charles Daff

Each Chapter 7 Trustee is charged with asking your clients various questions to determine the validity of the paperwork presented and to determine the clients financial picture. The questions from trustee to trustee are relatively the same, however some trustees have special questions that they asked. These special questions are developed from their experience as being a trustee and from the different cases that they have administered in the past. From time to time I will point out these special questions.

Trustee Daff asks if the debtor received a loan modification which lowered the principle of the property?

This question is a great question from a Trustee’s perspective because if the principle on the mortgage goes down, then that means there is more equity in the real property that has to be protected. By having to protect equity in real property, then that potentially exposes other items of personal property that the Chapter 7 Trustee can potentially administer for the creditors of the estate.

This problem does not come up too much because most loan modifications deal with the rate and amount of monthly payment. But I have seen where principle was reduced on first mortgages or second mortgages totally forgiven. With many houses having two mortgages, this could be a big problem if one loan were forgiven and the house prices have increased. Here in the Inland Empire we have experienced 10%-15% increases in the last year alone.

Practice Pointer:

You ask your client at the intake step the Trustee’s question “if the debtor received a loan modification which lowered the principle of the property?” This question will be prompted when you ask about the mortgages the client has. Sometimes a loan modification is in the works before the case is filed and then comes through after the filing of the bankruptcy. So it is good to know if the client is in the loan modification process as well.

 

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