How Bankruptcy Can Assist with Mortgage Loan Modification?

When a homeowner has fallen behind on their mortgage payments and are headed towards foreclosure, or are actively in foreclosure, a mortgage loan modification should be considered to prevent loss of their home. Many lenders offer programs to help homeowners apply for a loan modification. However, not all homeowners may find themselves out of time to apply for a modification, and their other various debt issues may have a negative impact on the outcome of their applications. Bankruptcy can in many instances assist homeowners resolve their various debt issues while also pursuing a mortgage loan modification. This is why homeowners should schedule a free consultation with experienced bankruptcy attorneys to consider whether bankruptcy should be used in conjunction with an application for a mortgage loan modification.

What Does a Mortgage Loan Modification Do?

When a homeowner buys a home, they sign a contract secured by a mortgage against a home. A mortgage loan modification is an agreement by the lender to change the terms of that contract usually to make it easier for the homeowner to make payments in the future, and to resolve missed payments from the past. A loan modification can take many different forms, including an agreement to put the missed payments on the back of the loan, thereby increasing the amount due on the mortgage. Loan modifications can also decrease the interest rate, and extend the length of the loan, which decreases the monthly payments, but can increase the total amount of interest paid over the life of the loan. In rare cases, a lender’s loan modification may include a decrease of the principal balance of the loan. In either case, a lender must agree to voluntarily modify the terms of the mortgage.

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How Does a Loan Modification Work?

A homeowner must generally make an application for a mortgage loan modification. This application will normally request the homeowner’s personal financial information, including their household income, expenses, and debts. Homeowners should be prepared to transmit copies of their pay stubs, bank statements, tax returns, contribution letters, appraisals, and other proofs required by the lender. This process can be very time consuming and requires attention to detail. This application may also require statements by the homeowner explaining the reason for their missed payments, and explaining the other hardships that require their application for a modification. This application process can take weeks or months to complete depending on the lender, and depending on the diligence of the homeowner. A mortgage loan modification may be granted on a trial basis, and may require the homeowner to make a series of trial mortgage loan modification payments over 3 or more months in order to prove to the lender that the payments are affordable and that the homeowner intends to follow through with the modification.

If an application is denied, there may be an opportunity for the homeowner to appeal the decision. However, because a mortgage loan modification is a voluntary process, lenders cannot be forced to grant a modification. If a lender does grant the application, and the homeowner obtains a loan modification, the loan is considered up to date and no longer headed into foreclosure, or in active foreclosure, as long as the homeowner continues to abide by the terms of the modification.

How is Loan Modification Different from Refinance?

A refinance is an agreement between a homeowner and a new lender to pay off the money due on the homeowner’s mortgage to their old lender. A refinance usually requires the homeowner to engage a mortgage broker who can locate mortgage lenders that may be willing to offer the refinance. This refinance process does not require the old lender’s agreement, making it very different from a mortgage loan modification, which requires the express agreement of the old mortgage lender. Generally speaking, both a refinance and a loan modification would accomplish the same goal of curing the delinquent mortgage and preventing the loss of the home in foreclosure.  A refinance generally requires a homeowner to have equity in their home since the new lender won’t lend more than about 60-80% of the value of the home. A refinance generally requires the homeowner to have good credit in order to entice the new lender to fund the refinance. These factors are difficult for many homeowners to meet, and so a loan modification remains the best option for many homeowners facing foreclosure.

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How Bankruptcy Can Help?

Generally speaking, when a homeowner files for bankruptcy, a lender is temporarily stopped from attempting to collect on missed payments, and this includes stopping any pending foreclosure action. A bankruptcy filing may even stop the loss of a home up to the day of the sheriff’s sale of the home by the lender. This power is called the automatic stay, and it’s one of the major benefits of bankruptcy, and gives homeowners time and breathing room to explore their loss mitigation options. The bankruptcy helps a homeowner address their outstanding debts, and in a reorganization bankruptcy like Chapter 13 and Chapter 11, gives the homeowner a framework to pay back missed payments, modify secure debt on their property, and take other action to reorganize their finances. 

One of the biggest benefits of applying for a mortgage loan modification while in bankruptcy is that a homeowner can “clean up” their other debt issues, making their financial situation more appealing to the lender reviewing the application. For example, outside of bankruptcy, a homeowner carrying $75,000.00 in debt may not, in the view of their lender, be able to afford their mortgage even with a modification because of the monthly payments on that $75,000.00, and the lender may deny their application on that basis. Inside bankruptcy, however, that some homeowner may be able to be considered by the lender to have $0.00 debt, because the bankruptcy discharge would wipe away the $75,000.00, thereby increasing the homeowner’s chances of being approved for the modification.

Another of the biggest benefits of applying for a mortgage loan modification in bankruptcy is, in many courts, homeowners have the ability to work with their lender on this application through a bankruptcy court process called loss mitigation. In loss mitigation, the bankruptcy court enters an order requiring the homeowner to make regular payments on their mortgage, which can sometimes be temporarily reduced, while the lender reviews the homeowner’s options. Loss mitigation is usually ordered by the court in an actual federal court order, which must be followed by the homeowner and the lender, and which sets forth dates by which certain actions must be taken. This structure is a great benefit to all parties, and ensures that the parties engage in the process in a timely manner and in good faith. If and when a lender offers a modification, the homeowner must move before the bankruptcy court for authorization to enter into the modification with the lender. This process grants transparency to all parties involved in the process, and further ensures that the homeowner remains in control of their home.

What If a Homeowner in Bankruptcy is Denied?

Another benefit of a reorganization bankruptcy for a homeowner is that they may have multiple ways to fix their mortgage problem through their case. A homeowner can primarily rely upon loss mitigation to cure their missed payments and to bring their mortgage current with their lender. If the lender cannot or will not modify the mortgage, the same homeowner may use their plan of reorganization to pay back missed payments over the life of their plan of reorganization. Alternatively, a homeowner may apply to the bankruptcy court for approval to obtain lending to refinance the old mortgage. The same homeowner can move for bankruptcy court approval to sell the home on their own timeframe. As a result, a homeowner is given flexibility to take multiple steps to save their home or at least realize any equity in their home through a sale on their own timeframe and without the pressure of a pending foreclosure action.

Mortgage Loan Modification with Middlebrooks Shapiro

Potentially facing foreclosure? Interested in exploring your legal options? The experienced attorneys at Middlebrooks Shapiro specialize in mortgage loan modification, all chapters of personal bankruptcy, and other bankruptcy alternatives. If you are struggling to keep up with your mortgage payments, book a consultation with our team. We will talk you through your options and explain the processes and procedures available to you, including loan modification and filing bankruptcy, so that you can make the best choice for you.