The crash of the housing bubble has left many homeowners in homes that are now not worth what was paid for them. The current economic crisis and rise in unemployment are leaving many homeowners with mortgages they cannot afford for houses that they cannot sell.
As a result, there has been a rise in loan modification programs. Loan modifications sound appealing because of the promise to work with the lender to lower payments, allowing the distressed homeowner to keep their home and avoid foreclosure.
These programs are often nothing more than scams, however. In such circumstances, Chapter 13 bankruptcy may offer you the best option of keeping your home and reducing payments.
Loan Modification Scams
While not everyone that is offering to help you with a loan modification is a scammer or has a dishonest intent, many do. According to NeighborWorks’ Loan Modification Scam Alert website, there are six “red flags” to indicate that you may be working with a loan modification scammer. Those are:
Advance fee – in this instance you run the risk of the company pocketing your money and doing little to nothing to help you
Guarantee to stop foreclosure or guarantee to get loan modified – a legitimate loan modification company will only promise to work their best on your behalf
Advised to stop paying mortgage – do not send your mortgage payment to anyone other than you lender
Asked to sign over your deed – do not sign over the deed to your home, nor should you ever be pressured into signing papers you have not read
Company claims “government-approved” or “official government” modifications – if this claim is made, contact your lender they can tell you if you are eligible for a government programs that prevent foreclosure
Asked to release personal information to a company you are unfamiliar with – only give personal information to companies that you are working with and trust
Along with the six red flags above, you should be weary of lease-back (rent-to-own) programs.
There are other factors that should be considered with loan modifications.
Often times, the lender or the loan modifying company are unresponsive to borrower needs and questions.
If the principal of the loan is reduced, the IRS may consider this taxable income and saddle the borrower with a tax bill.
Benefits of Chapter 13 Bankruptcy
While a loan modification may seem like a way out of your current situation, a modification may just leave you in a worse position than you started, including being homeless because you signed your deed away. However, there may be a better option for those in need of mortgage help who want to keep their homes – Chapter 13 bankruptcy.
Titled in the Bankruptcy code as “the wage earners’ bankruptcy,” Chapter 13 bankruptcy is a way for those who have a regular source of income to reorganize their debt into a manageable monthly payment. Chapter 13 bankruptcy allows debtors to reschedule their debt and make payments to creditors over a three- to five-year period, with the discharge of the remaining debt at the end of the repayment period.
Chapter 13 bankruptcy may be a help for most homeowners who are facing foreclosure and/or passed due mortgage payments, because filing for Chapter 13 bankruptcy will stop the foreclosure process. Chapter 13 bankruptcy allows debtors to include their mortgage payment arrears with the other rescheduled payments. This way, debtors are given the opportunity to catch-up on any missed mortgage payments.
It should be noted that if you are in Chapter 13 bankruptcy and you get a loan modification, it may appear that your mortgage payment goes down. However, that extra money that you are “saving” will still go toward the Chapter 13 repayment. Because the money that you save may be seen by the bankruptcy court as disposable income, that extra money may be used to pay off debtors. The money saved by the loan modification may be calculated into your disposable income, thus, possibly increasing the amount of money paid to unsecured creditors.
Also, once you sign the papers for a loan modification, you will not be able to undo it.
Possible Consequences of a Loan Modification During Chapter 13 Bankruptcy
It is extremely important to discuss the possible ramifications of obtaining a loan modification while in Chapter 13 bankruptcy. While the loan modification may seem like a logical way to “save” money or “lower” payments, there are many unforeseen consequences that the lender may not discuss with you or may not fully understand. The possible consequences may include:
Monthly payment plans may go up as to avoid creating disposable income
Mortgage arrears that were being paid through the Chapter 13 repayment plan may be placed on the “back” of the mortgage, which will increase the amount of interest to be paid as the mortgage balance has increased
The portion of the monthly Chapter 13 payment that was used to pay mortgage arrears may be used to repay unsecured creditors, possibly increasing the percent paid to unsecured creditors
If you are considering a loan modification, speak with an attorney to discuss and learn about all of your options, including bankruptcy, BEFORE beginning the lengthy and time consuming process of modifying your home loan. An experienced bankruptcy attorney can talk with you about your situation and possible options that you have so that you can make an informed decision about your future.