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Monday, March 4, 2013

Chapter 13 Bankruptcy or Mortgage Modification What is My Best Option?

            In a perfect world every delinquent homeowner borrower would receive a timely mortgage modification from their lender which neatly fits their current financial situation to save their home. Unfortunately many homeowners who have applied for mortgage modifications have found out that the process moves incredibly slowly especially with the major lenders with the most delinquent loans. Furthermore, when and if a mortgage modification is finally offered it does not offer the relief needed for them to keep their home for the long term. One of the problems is the size of the mortgage arrearage that has accrued during the drawn out mortgage modification process. With government programs like HAMP that  generally do not provide mortgage principal balance reduction the size of these arrearages can offset the effect of  the interest rate deduction and extension of maturity date on the new monthly mortgage payment being offered to homeowners. The problem is when the mortgage arrearage is added to the current principal balance this increase in the principal balance negates the potential reduction offered by the lowered interest rate and extended maturity date. The net result is the borrower being offered a new loan with a principal balance well in excess of the current value of their home with a slightly reduced new mortgage payment. This type of modified loan does not offer any real true benefit to a delinquent homeowner borrower. Therefore, before starting the mortgage modification process with a lender a borrower needs to find out the potential modification programs available for their loan and approval timelines if at all possible. The borrower than should next consult with a bankruptcy attorney to  determine if a Chapter 13 filing is a better option for them than pursuing what may turn out to be a dead end modification.
          The best candidate for a Chapter 13 is a debtor who has suffered a temporary income setback that caused their default, but has now returned to work and said default was not directly attributable to the terms of loan itself. That is it was not an 80/20 high interest loan combination, but instead a loan with a reasonable fixed rate of interest with a monthly payment that now that the borrower is working again is a reasonable amount to pay. The borrower must also have the current ability to pay the extra monthly amount required into a Chapter 13 plan to at least bring the mortgage arrearage current upon completion of the plan. This is an extremely important point. If a borrower does not have sufficient income to fund a plan than a mortgage modification with the necessary lowering of the mortgage payment, if attainable, is the only real option they can pursue to save their home.  However, a borrower who has the current ability to fund a Chapter 13 plan needs to make an important decision. Do they risk applying for a mortgage modification only to be rejected or offered an unacceptable modification and forgo their opportunity to file a Chapter 13 later due to the increase in the mortgage arrearage making it not feasible for them to fund a Chapter 13 plan.  Realistically I have not seen delinquent homeowner borrowers demonstrate the ability to set aside the necessary monthly mortgage payments while applying for a modification to offset the increase in the mortgage arrearage to keep their ability to file Chapter 13 viable. This decision of Chapter 13 versus mortgage modification needs to be made with the advice of bankruptcy counsel who can review the debtor's financials and provide them with a realistic opinion as to the feasibility and success of filing a Chapter 13. The advantage of a Chapter 13 bankruptcy versus a mortgage modification is that the only real party in interest you have to satisfy is the Chapter 13 trustee and the debtor is not subject to the whims of the mortgage lender. If the debtor has sufficient income to support their plan as determined by debtor's counsel and provided to the Chapter 13 trustee the plan will be confirmed. Additional benefits of a Chapter 13 include the possibility of discharging some or all of a debtor's unsecured debt dependent on their assets and income. If a plan is going to include the discharge of unsecured debt wholly unsecured second mortgages can be deemed unsecured by the plan as well judgment liens which impair a debtor's homestead exemption. I have written this blog article based on my experience with debtors over the past several years since the mortgage crisis first started who after one or more years of unsuccessful attempts to obtain a mortgage modification contacted me regarding Chapter 13 as an option only to be told it was no longer feasible due to the amount of their mortgage arrearage. It is my hope that any borrower who is not too delinquent and is weighing their options will consult with a bankruptcy attorney first before blindly applying for a mortgage modification so they can make an informed decision what option best fits their situation.