Your home is important to your family. When hard times hit and you can’t make the monthly mortgage payment, it can be difficult to get caught up. There are options on what to do with your mortgage. Many people have heard of loan modification, but is it a better option than filing for bankruptcy?
Loan Modification Process
With a loan modification, a homeowner can apply to have the mortgage payment reduced in order to have affordable payments. The mortgage can be changed in two ways. You can either change the length of the loan or reduce the interest rate. The missed payments are added to the end of the loan. The modification process is offered by the individual mortgage lender. In order to get a loan modification, you have to call your mortgage company and request an application. Most homeowners are able to start the process of loan modification without any initial cost. However, each lender has its own process and application. Many mortgage lenders require you to have documents, such as pay stubs and recent tax returns. If your application is approved, it can stop the foreclosure but you first need to wait for the bank’s approval. This can be the hardest part of loan modification and waiting to see if foreclosure is going to be stopped. If you do have your home set for foreclosure auction then you will need to be in communication with the bank to know if loan modification can actually stop the foreclosure.
Is Loan Modification Right for You?
When deciding if a loan modification is the right decision, consider affordability. If the lender thinks you aren’t able to afford the new payments or you have other debt, such as student loans or a car loan, then you may not qualify. If you are current in your payments then you may not qualify. It can, however, take months for your application to be considered so if it is denied then your debt can lead you to foreclosure. There are costs associated with a loan modification. Yes, you will have lower mortgage payments but there are extra charges, such as additional interest, a longer period of payback, and new fees and loan costs to consider.
Chapter 13 Bankruptcy
The only way you can be 100% certain to stop a foreclosure is to file a Chapter 13 bankruptcy. Some homeowners file for Chapter 13 bankruptcy in order to save their home while they are still waiting to hear on the home loan modification. There are a lot of differences when it comes to home loan modification and filing for Chapter 13 bankruptcy. First, Chapter 13 bankruptcy stops the foreclosure immediately and then sets the repayment plan. When you file Chapter 13 bankruptcy, you will create a plan to ensure that your regular payment is met, along with the additional amount for any missed payments on the loan. Not only does the repayment plan help with your home, but it can also make your other bills affordable and the plan can eliminate or reduce your other obligations, such as medical bills, credit card bills, and other unsecured debt. When you complete the repayment plan then you will start making regular monthly mortgage payments to the lender and the loan is considered to be in good standing. You are able to apply for a home loan modification after you have completed the Chapter 13 plan. You would just have to contact the lender and apply to reduce your payments even further.
Benefits of Chapter 13 Bankruptcy
Even though filing for bankruptcy is a serious financial decision, there are some benefits to Chapter 13 bankruptcy. You won’t have to get behind on your mortgage payments in order to file. If you have already missed payments and risk foreclosure then filing can give you a chance to stop the foreclosure and catch up with some payments. You are able to use future income to keep your property and repay your creditors. Other forms of unsecured debt are also discharged through the process. If you have a second mortgage, there is special treatment for second mortgages that can either eliminate or reduce those debts.
Chapter 13 Bankruptcy and Loan Modification
Loan modification and Chapter 13 bankruptcy aren’t exclusive. Modification can work as part of Chapter 13 bankruptcy. Loan modification not part of bankruptcy is voluntary, but lenders are required to make changes if they are approved by the bankruptcy court. There are some minimum legal requirements that need to be met before a bankruptcy court accepts reorganization. One of these requirements is that all loans will need to be paid in full during the term of the bankruptcy plan and this plan can’t be longer than five years. There are also some other restrictions on changing mortgages within bankruptcy. The bankruptcy plan might not change secured debts on your principal residence. Mortgages that aren’t secured, such as second mortgages, can be eliminated or changed. Restrictions on home mortgages also don’t apply to mobile homes, rental property, or home loans secured by other real estate that is not the principal residence.
Will You Need Bankruptcy after a Loan Modification?
There is no clear-cut answer to if you will need bankruptcy after modification and it depends on your situation. You can work with a Dayton bankruptcy law firm to determine whether or not you should continue your Chapter 13 case after loan modification. If your repayment plan has other debts besides your mortgage then you may want to stick with a bankruptcy plan. A lawyer knowledgeable about the bankruptcy process can help you understand your options and evaluate your case.