While loan modifications don’t follow bankruptcy and vice versa, modifying your loans, such as your mortgage, can help you when filing a chapter 13 bankruptcy.
Facing Bankruptcy: What Loan Modifications Are and How They Can Help
No matter how hard you try, sometimes you just can’t stay current on your mortgage payments. If you find that you just cannot afford those high payments, and you need to do something before you lose your home, maybe you should consider loan modifications, filing for chapter 13 bankruptcy, or loss mitigation.
Loan modifications change the existing terms of a loan in an effort to make payments more affordable. The goal is to prevent foreclosure by lowering the monthly payment enough so that the homeowner can make payments on time and keep their home. So what are the options available under loan modifications?
- Lower Interest Rate - Lenders have the option of reducing the amount they pay each month by having the mortgage company lower the interest rate n the loan. Interest rate reductions can either be temporary or permanent.
- Postponing Payments - Most of us have times in our lives when something prevented us from paying our bills on time. Our late payments could have been due to higher than normal medical bills, a cut in salary or work hours, or something as simple as an unexpected car or home repairs. Asking a mortgage company to postpone the due dates on our mortgage payments may be exactly what is needed until we can make the payments again on-time.
- Converting from a Variable to Fixed Interest Rate - If you have a variable rate mortgage with a high-interest rate you may wish to consider having that changed to a lower fixed interest rate that you can better afford.
- Extending the Mortgage Term - Generally speaking, the longer you have to pay for something, the lower your payments will be. By negotiating a longer mortgage term, you can lower your monthly mortgage payments to an amount you can afford to pay.
Back-end those Mortgage Arrears - If you have fallen behind and can not catch-up, the lender may consider back-ending the mortgage arrears (capitalize the arrears) by adding them to the outstanding principal amount. If the bank has also agreed to lower the interest rate and/or extended the mortgage term (ie. from 30 to 40 years) the monthly payment may not go up or may actually go down
Although mortgage companies would rather try to modify a mortgage loan to prevent foreclosure, oftentimes they are unable to justify a modification and recommend that the homeowner sell or “short sale” the home. In considering a loan modification application and package, the lender determines whether a loan modification will actually prevent foreclosure or will the debtor still likely be foreclosed upon in the near future. This part of the bank’s analysis focuses on the homeowner’s income and other obligations. The bank’s decision will also depend on the appraised value of the home in relation to the outstanding principal. There are many factors that go into the Net Present Value (“NPV”) calculation that the lenders use. The process is lengthy and complicated. Beware of anyone who guarantees success. Also, beware of anyone who advises you to fall behind intentionally on your mortgage to qualify for a modification. You should seek competent legal counsel in this process. Do not go it alone.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy involves a plan of reorganizing a debtor's finances, whereby the debtor proposes a repayment plan of all mortgage arrears over a 3-5 year period. The chapter 13 plan payments must also pay outstanding priority debts like income taxes and domestic support obligations. The chapter 13 plan will also pay a portion of the debtor’s unsecured (ie credit cards) depending on the debtor’s assets and income. This reorganization of finances is handled by the federal bankruptcy court through a bankruptcy trustee who receives payments from the debtor and distributes that money to the creditors.
For debtors who wish to hold onto their homes but have been unsuccessful in convincing the mortgage company to provide them with mortgage loan modifications, contacting a bankruptcy attorney and filing chapter 13 bankruptcy may be the only answer to foreclosure. As soon as chapter 13 is filed, all foreclosure proceedings by the mortgage company must cease. Filing for Chapter 13 bankruptcy may also be a good idea if you plan on keeping other properties for which you are having difficulty making payments on time. Typically, people who have other debts and are having trouble keeping current on their mortgage payments are also having trouble paying their other bills. That’s because the mortgage is generally the first thing people pay.
Another possible solution to a failed loan modification application, outside of bankruptcy, is loss mitigation in bankruptcy. Loss mitigations are loan modifications that are supervised by the bankruptcy judge in a chapter 13 bankruptcy. The objective is to arrive at a solution to foreclosure through loan modification. The loss mitigation is essentially a supervised loan modification application in bankruptcy. However, while in chapter 13, the Debtor can propose to pay the Chapter 13 trustee an amount that the debtor can afford (something you could not do outside of bankruptcy). If the negotiation is successful and the debtor is offered a loan modification, the loan modification will be approved by the court in chapter 13. During this process, the debtor is protected from foreclosure by the “automatic stay.” However, when the homeowner applies for modification outside of bankruptcy the foreclosure “clock” continues to “tick”. Thus, if the final answer from the lender is “no”, the foreclosure sale may already have been scheduled and the homeowner may find themselves dangerously close to losing the home.
Loan modifications can be initiated by a person without the help of a lawyer, but it is a lengthy and complicated process. There can be no assurances of success. It is then that homeowners seek the assistance of an attorney who has the expertise and know-how to deal with a mortgage lender. That assistance can be the preparation of the necessary loan modification documents and negotiation with the lender. However, if the debtor is well behind in the mortgage and the foreclosure process has commenced, the debtor would be better served and more protected by filing for chapter 13 bankruptcy and requesting loss mitigation (chapter 13 bankruptcy with loan modifications). If you find yourself in a situation where you seek a modification or may be losing your home to foreclosure, you can contact Robert H. Solomon P.C. for help. They provide free bankruptcy and loan modifications consultations and want to help you make the right financial decisions.