Bankruptcy vs. Mortgage Loan Modifications

Faced with the reality of being past due on their loans or even foreclosure, many homeowners are looking for options that might help reduce the impact on their financial future, as well as their families.  One such option is a mortgage loan modification, which affords homeowners who are behind on their payments an opportunity to modify their monthly payment to an amount that they can more easily afford.  These modifications may also include the ability to tack on previously missed payments (aka “arrears”) to the back or end of their loan.

Mortgage Loan Modification Detail

The trouble is that not everyone, and not every property type, may qualify for a loan modification.  There are government-managed programs, such as Home Affordable Modification Program (HAMP), which have very specific guidelines regarding which homeowners might be eligible.  There are also loan modification programs offered by individual mortgage lenders.  These lenders typically have their own internal guidelines which may or may not be applied consistently from borrower to borrower.  Often times, attempts to modify a mortgage without the assistance of a government-managed program are futile.

Also, mortgages on investment properties may be eligible for modification, but unlike personal residences, they do not fall under the protection of most mortgage loan modification programs, as the initiative is designed for residential properties only.

Why the bankruptcy alternative makes sense

One of the biggest impediments that homeowners face is that due to the large number of applicants for loan modification, you might not know for months whether or not you qualify.  These additional months of delinquent payments could end up triggering the start of the foreclosure process, leaving homeowners in the exact place they were trying to avoid.

One alternative to seeking a mortgage loan modification would be filing for Chapter 13 bankruptcy, which has many benefits including the ability to save both your residential home as well as investment properties.  Chapter 11 for homeowners may be available as well.  Regardless of the chapter, the foreclosure process stops once the bankruptcy case has been filed.  Hopefully, with the assistance of a qualified bankruptcy attorney, you will be able to protect your assets, your rights, and most importantly, your house.

In Chapter 13, homeowners are given from 3 to 5 years to “catch up” payments they may have missed prior to the bankruptcy filing.  There is also a possibility that you can strip off or eliminate a wholly unsecured second mortgage on the residential property.  For investment properties, bankruptcy may allow the homeowner to modify the mortgage payment and manage the pre-filing arrears altogether.

Perhaps the biggest benefit of Chapter 13 is that you may be able to prioritize making regular monthly payments to the mortgage lender, as well as catching up the arrearages, while at the same time discharging certain unsecured debts owed to non-mortgage creditors.  This typically frees up and improves the homeowner’s budget compared to where it was prior to the bankruptcy filing.

Even though you may not quality for Chapter 13 (or Chapter 11), it is also possible to stop a foreclosure action with Chapter 7 bankruptcy.  Unlike Chapter 13, Chapter 7 does not afford the homeowner a lengthy time period with which to catch up on the mortgage arrears, but it will give the homeowner a few months to do so.  Once the Chapter 7 has been filed, the lender must seek Court approval to restart the foreclosure process.  For a better assessment of your current situation and to discuss which options are available to you, get in touch with an experienced bankruptcy attorney today.