Generally speaking loan modifications and bankruptcy are like oil and water. The two concepts do not work well together. If a debtor is in the middle of loan modification then any subsequent bankruptcy filing will put a stop to the process until the bankruptcy is finished. Also, if a debtor is in bankruptcy, the bankruptcy court must approve any loan modifications.

A loan modification and a bankruptcy can co-exist but it requires a lot of extra paperwork and many more hoops to jump through. It is better for a debtor to actually finish one before starting another. Technically speaking, if a debtor does a loan modification and then immediately files for bankruptcy, then the debtor’s transaction may fall into the presumption of abuse. The presumption of abuse is important because if the debtor pulled out money or paid down some balance then the debtor may have to return the money or reverse the transaction. However, most lenders will not cry foul unless the debtor intends to renege on the new deal.