Many clients who are trying to save their homes try loan modification before they try bankruptcy. It’s not a bad idea. The problem is, many banks turn loan modification into a frustrating, slow-moving, labyrinthine process.
Often, the process does not move fast enough to protect a homeowner from foreclosure on its own. Back payments and fees continue to accumulate, and homeowners are forced to take another route.
One method is to file Chapter 13 bankruptcy. Chapter 13 puts an automatic stay on foreclosure efforts. You’re still responsible for making monthly payments on your mortgage in addition to your Chapter 13 plan payments, which in part will go towards paying off the mortgage payments you’ve missed.
Some homeowners find this is just enough relief to allow them to keep their house, because they’re not juggling dozens of debts at a time. Others look ahead to the day their Chapter 13 is discharged. The automatic stay will disappear, and they’ll still have a large house payment. These homeowners find Chapter 13 to be an ideal time to pursue loan modification. They now have years to deal with the bank’s tendency to string borrowers along.
Oddly, banks tend to grow more cooperative about issuing loan modifications to Chapter 13 borrowers. At this point it may even be in their best interests to do so.
If you take this route, once your bankruptcy is discharged you’ll be in a far better financial position. The plan payments have gone away, your other debts are gone, your mortgage is out of arrears and you have a more manageable home payment. You don’t have to move. You’re well-positioned to pursue a fresh financial start.
There are some caveats.
One caveat is you’ll want to read the terms of the modification very closely. You want to avoid any loan modification agreement that asks you to reaffirm the debt. This will leave you on the hook for all the missed mortgage payments and late fees normally discharged by Chapter 13. If you can’t pay them– and you probably can’t– you could still lose the house.
Trial or short-term modifications are another common pitfall. They reduce your payments, but only for a little while, and leave you liable for the difference between the old payment and the new payment at the same time.
Other terms and hidden conditions could be equally detrimental. Having your bankruptcy attorney examine your loan modification documents before you sign on the dotted line is a good idea. You’ll be legally bound by whatever you agree to, and you don’t want to place yourself in a worse position.
Trying to save your home? Call Sadek and Cooper today for your free consultation. We can help you choose the right route forward.