If you were laid off or cannot be current on your mortgage payment or any other monthly financial obligation, you can choose to modify the loan or file bankruptcy. With the help of a credible law firm like the Los Angeles Bankruptcy Attorney, you can combine the two options. It allows you to keep the home, reduce the mortgage payments, avoid default, and climb out from debts.
An Overview of Loan Modification
Loan modification could be defined as the change that creditors make to the terms of mortgages because of the financial challenges. The aim is to lower the monthly payments to what you will afford. Luckily, this amount can be realized in numerous methods. The creditor will calculate the new payments based on changes that it makes to the initial loan contract.
Why Your Lender Will Allow Loan Modification
Adjusting your mortgage can be less time consuming and cost-effective for a creditor and take a less emotional or financial toll on you than other financial or legal remedies for recovering money from an individual who can't repay the loan.
Without loan modification, the lender can choose to use either of the following options when you fail to clear the outstanding balance:
- Foreclose on the home: Foreclosure happens when a creditor repossesses a house of a debtor who can't repay their mortgage, evicts the borrower, and then sells their home.
- Engage in a short sale: Short sale is selling of a house for less than what you owe on your mortgage. It will also result in your losing your home.
- Charge off your loan: The lender could consider your loan as a loss if the creditor determines that the loan is not likely to be collected.
- Try to collect your debt through bank levies, collection agencies, or wage garnishment.
The options mentioned above might lead to damage to the credit score or even loss of the home. On the other hand, the loan modification allows you to continue living in your home, and insignificantly affect your credit score compared to a foreclosure. It could even have no impact on your credit in case of a government mortgage modification program.
Modifying the Mortgage Loan
Discussed below are methods your lender could modify the loan:
Reduce the Interest Rate
Reducing your interest rate could lower the monthly mortgage payment by a significant amount of money. For instance, a two hundred-thousand-dollar-mortgage with an interest rate of four percent on a thirty-year repayment period is nine hundred and fifty-five dollars monthly. On the contrary, the same mortgage with a three-percent interest rate has a monthly payment of eight hundred and forty-three dollars.
While it is like loan refinancing, you do not have to pay closing fees or costs.
Reducing the Loan Principal Balance
Occasionally, creditors will reduce the amount you owe. During the housing crisis, loose lending standards prevailed, and property value tanks left most homeowners underwater with the loans.
Whether the creditor decides to lower the principal depends on:
- The current housing market
- The total loss the creditor will suffer if they choose a reduction of principal balance over foreclosure.
- The amount you owe
Roll Late Fees into the Mortgage Principal
If you've accrued previous outstanding charges on things such as late fees, escrows, or interest, your lender could add that to the principal balance and amortize your loan. In other words, the loan will be spread over time with the new loan balance. Should you extend the loan's length, you might pay less in monthly payment even when you owe more in the principal.
Switch Your Loan from Adjustable-Rate-Mortgage to Fixed-Rate Mortgage
This option will reduce the existing payment but could protect you from increasing interest rates.
Because an adjustable-rate mortgage has a floating rate, it varies with the current market. For instance, your rate could rise to four percent from three percent if the average rate is four percent. When you lock your interest loan, you are sure you will pay the same interest rate throughout the mortgage life, irrespective of what happens to the market.
Lengthen the Repayment Term
Another way to make your loan payments more cost-effective is by extending the repayment length. For instance, if you have a loan of one hundred thousand dollars at a 4% interest rate, payable with fifteen years, you will make a monthly payment of $740. If you choose to extend the loan by ten years, you will be paying $528 monthly.
Please note, you will pay more interest over your mortgage's life if you extend the repayment duration.
Loan Modification After Filing for Bankruptcy
As a borrower, you do not require to wait until you file for bankruptcy to modify your loan. Nevertheless, if you have already brought bankruptcy, you can use an automatic stay. An automatic stay is an order that is tailored to prevent foreclosures, among other debt collection actions. It gives you peace of mind while you pay off your debt using Bankruptcy Chapter 7 or develop a Chapter 13 repayment plan.
How It Works
After filing bankruptcy, the court takes control over virtually everything which affects your finances. You are permitted to continue with daily transactions like paying a utility bill and purchasing groceries. Nevertheless, loan modification isn't a usual course of business.
Whether the court will approve loan modification depends on whether your bankruptcy case in Chapter 13 or 7.
Can You Modify Your Loan Using Bankruptcy Chapter 7?
Unlike Chapter 13, a Chapter 7 bankruptcy case does not have mechanisms that help save your house when you are behind on the payment. Nevertheless, after filing a Chapter 7 case, the creditor settles on a workout (loan modification), the law does not stop a borrower from modifying their loan.
Please note, it is at the discretion of the bank, and the creditor will want until it is clear that the trustees are not interested in disposing of the home for the lenders' benefit.
If you are a bankruptcy filer, the case will last 4 to six (6) months from when you brought the case until the discharge. All your assets will go to the bankruptcy estate. Although you will have control and access to the property, you will share the power with the trustee. The bankruptcy judge appoints the trustee to oversee the case.
Your Property and The Trustee
While your home is one of the bankruptcy estates, you cannot sell the home or modify the loan without the court's permission. It is because the bankruptcy trustee should have adequate time to decide whether the lenders have a right to have the asset disposed of and the sale proceeds distributed among them.
What Happens When the Bankruptcy Trustee Does Not Abandon the Home?
When the trustee does not abandon the asset, chances are because the home has a worth that the homeowner cannot safeguard with a bankruptcy exemption. The bankruptcy trustee will use the nonexempt asset to foot other loans.
When you file for bankruptcy, you can exempt or protect some assets from the court, including your home's equity to a given value. If the home has more equity than a homeowner could exempt, the bankruptcy trustee will sell the home and pay off other debts like credit card or medical bills. However, the trustee should first clear the mortgage, the trustee's commission, and sale costs. They should also give the homeowner the amount they are permitted to exempt.
When the Trustee Abandons the Home
The bankruptcy court control lasts until the trustees determine that your home does not benefit the bankruptcy estate and will not liquidate to pay off lenders. The trustee will signal the intention by releasing the property's control to you or bringing a notice with the bankruptcy court to abandon your asset. If the case is not complex, the bankruptcy trustee will inform you at the 341 meetings of creditors that your case is not an asset case. The bankruptcy trustee should abandon your home by filing a no-asset report with the bankruptcy court.
Deciding to sell a home is a complicated decision, and the trustee should take time evaluating. Meanwhile, you can ask your creditor to modify your loan (your bank could send your bankruptcy attorney a letter asking you to modify the mortgage).
If your creditor approves your loan modification, and the bankruptcy trustee has not abandoned the home, you should do either of the following:
- Request the trustee to bring a notice of abandonment of the asset, or
- Bring a motion requesting the bankruptcy judge to approve the loan modification.
However, you do not have to apply if the trustee sells the home. Do not be surprised if your creditor fails to take action on the loan modification until it is clear that the trustee will abandon your home.
Can You Apply for a Loan Modification Using Chapter 13?
Although loan modification and filing for a chapter 13 case are different, they work towards keeping your home. Also, they can work together. Chapter 13 could prevent foreclosure and give you adequate time to work on a lender loan modification.
Chapter 13 works by letting you catch up on your loan payments. Usually, you develop a repayment plan. If the bankruptcy court approves the plan, you will make payments for three (3) to five (5) years.
Even if you are paying your loan arrears through the repayment, you can work with the creditor to modify the mortgage. It is not uncommon for homeowners to file bankruptcy to stop foreclosure and apply to their lenders to change the loan terms and conditions.
When applying for a loan modification, you are requesting your creditor to change your loan terms. The interest rate can be adjusted hence reducing your monthly payments. Alternatively, the missed payments might be included in your loan's end, increasing the loan length. When the loan modification becomes effective, the loan will be current.
Entering the Loan Modification Agreement
You should work with your creditor by following the steps below to obtain a modification:
Your lender will require evidence of income to make sure that you have an income to make modified monthly payments. The lender will also require your credit report. However, no maximum or minimum score is required. Usually, this is to determine the number of loans you have to service monthly. You should also present:
- Proof of your expenses: Be prepared to prove the amount of money you spend every month.
- Hardship letter explains what took place and affected the ability to keep your mortgage payments current and how you plan to improve the situation. Some of the reasons that might make you unable to afford the current loan payments include divorce, legal separation, natural disaster, illness, health pandemic, loss of income, or housing costs increase.
- IRS Form 4506-T allows your creditor to access the Internal Revenue Service's tax details if you fail to present it.
After all your paperwork is completed and your creditor determines that you can meet the minimum requirements, you will be able to make trial payments. Typically, it is three payments.
After you have successfully made the trial payments, your creditor will decide on your loan modification.
Who is Eligible?
Qualifying for loan modification depends on whether a mortgage firm or bank and the mortgage servicer owns the loan. Each loan servicer has its criteria and requirements. However, generally, you could be eligible if:
- You do not qualify for mortgage refinancing.
- You're either in the risk of default or delinquent due to changes in financial circumstances.
- Your home's value has deteriorated, and you owe more than the value of your house.
- You spend more than thirty-one percent of your total monthly income on housing costs like mortgage payment, homeowners' association dues, property taxes, and insurance.
An Example of Loan Modification in Chapter 13 Bankruptcy
Assume you brought Chapter 13 bankruptcy and included five thousand dollars in previous loan payments. Once your case is filed, you apply for a modification with your mortgage firm. While in bankruptcy, you continue making payments to the trustee, which includes the five thousand dollars.
Later in the year, loan modification is confirmed. By then, you have paid one thousand dollars to the lender through the repayment plan. The mortgage modification comprises the four thousand dollars owed on your arrears claim.
If you do not want more money to go to your lender, your experienced bankruptcy attorney should bring a motion with the court to request the judge to approve your loan modification. The motion should be set for a court hearing. It could be on file for twenty-four days; to allow interested parties to oppose it. If nobody objects it and the modification terms favor you, chances are the judge will confirm it. If any party objects the modification, it will be set for a court hearing, allowing all parties to testify.
After you have a court order approving the loan modification and entering an agreement, your lawyer should request the judge to modify the plan's terms to get rid of arrears to your lender. It will also require a motion whose process is identical to loan modification. The modification motion stays for a while, allowing creditors to oppose it if necessary or is set for hearing.
Is Chapter 13 Bankruptcy Essential Following a Loan Modification?
After you've new loan terms, your bankruptcy lawyer should help determine whether it is practical to continue with bankruptcy. Since all debts are included in one way or another, it will depend on whether your repayment plan addresses other issues apart from mortgage.
Below are questions a debtor can use to determine whether there are advantages to managing the debt by staying in bankruptcy:
- Do they have credit card debt that might be discharged in a Chapter 13 case?
- Are they eligible to remove dischargeable debts in a Chapter 7 case?
- Does he have income tax debt to consider?
- Are they willing to work with lenders without the bankruptcy court's protection?
- If they convert to a Chapter 7 case or dismiss their case, will they have to renegotiate an auto loan that they were paying through the repayment plan?
If you dismiss the Chapter 13 repayment plan, you will not have the bankruptcy court's protection. That means your lender can use any collection action allowed by federal and state laws.
Why You Should Hire a Bankruptcy Attorney
Below are reasons why you should consider hiring an attorney:
Help You Know Your Rights
If you are not sure about what to do and want to know about the available options, a seasoned attorney will help you understand your rights and advise you on the best action in the situation.
Fill Out the Loan Modification Paperwork
The mortgage modification process is complicated, and you could be confused about:
- Filling the application
- Documentation to present alongside your application
- How to explain the financial situation in your application
Your attorney could help you file the necessary paperwork and ensure you present the situation in the best possible way.
Find a Skilled Bankruptcy Attorney Near Me
A loan modification is one of the solutions to use if you want to keep your home. Your lender will agree to reduce your interest rate, reduce your principal, or extend the repayment plan, resulting in lower and pocket-friendly monthly payments. However, loan modification is complicated and demands caution. That is why consulting a knowledgeable bankruptcy lawyer is essential. For many years, wtel:424-285-5525e at the Los Angeles Bankruptcy Attorney have helped homeowners negotiate their loan modification. If you are facing financial hardships, contact us today at 424-285-5525 to determine the best loan modification option.