Bankruptcy is a common term in California, given that many homeowners fall behind on their mortgage payments. The debt problem keeps escalating as people experience challenges like unemployment, divorce, and unexpected medical bills, among others. If you are falling behind on your loan payments and looking for a way out, the Los Angeles Bankruptcy Attorney can guide you through bankruptcy and the loan term extension.
Loan Modification Options
It's common to experience financial challenges that might make it hard to meet your monthly loan installments. If you are struggling to pay your mortgage or other loans, you have several options to consider:
- Loan refinancing
- Loan term extension
- Filing for bankruptcy
It's wise to consult an experienced bankruptcy attorney when seeking a solution for your debts. An attorney will help you determine the best way to deal with the debts to ensure that you reach a permanent solution to your debt issues. You can choose one of the listed options, and you can also combine several options to save your home or property from foreclosure. With the guidance of an attorney, you can lower the monthly loan installments, avoid loan defaults, and work your way out of debt.
You should consider loan modification if you can no longer afford to make the monthly installments. Loan modification entails altering your loan terms through interest reduction or extending the loan term to make the installments affordable.
The Objectives of Loan Modification
The goal of a loan modification is to make the loan affordable for the borrower. Loan modification also prevents the lender from losing money. After modification, a borrower can meet the lower installments, which helps minimize the default rate. A lender has the mandate to alter the loan terms to make the loan more affordable for the borrower. Loan modification mainly entails:
- Altering the loan type typically from an adjustable interest rate loan to a fixed interest rate loan
- Changing the loan's interest rate by setting a lower rate
- Extension of the loan term. For instance, if the original loan was payable in 15 years, the lender can extend the loan to 25 years to lower its installments.
- Deferring some of the principal amounts
- Exempting or forgiving the borrower from paying some of the principal amounts.
- Adding the loan arrears to the back end of the loan
Some conventional lenders and financial institutions have in place loan modification programs. Borrowers can also take advantage of government programs to secure favorable loan modification terms. Seeking a loan modification is crucial because it can help you avoid foreclosure, often a costly process.
When to Seek an Extension of Loan Term
As long as you have suffered a significant hardship or income loss, you can request a loan modification from your lender. By extending your loan term, you will receive a better deal and pay lower monthly installments. When you start falling behind on your loan payments, your lender will start sending late notices and late payment penalty threats. If you miss three to four monthly installments, you might receive a notice of default from the lender or even a foreclosure notice in the case of a mortgage loan.
You should not wait until you start receiving lenders' notices for you to contact a bankruptcy attorney. You should contact an attorney immediately you realize that you can't pay your loans on time. Upon contacting an attorney, you can discuss loan modification options and chart the best way forward. You don't have to wait until you default all your loans to request a loan modification. Before you even become delinquent on the payments, you can request a loan modification.
Why should you seek the assistance of an attorney while seeking a loan modification? If you attempt to go it alone, most lenders will refer you to their loss mitigation departments. The large volume of phone calls from people seeking loan modification often overwhelms these departments. You will just be one of the many people seeking modification of their loan. With so many people calling the loss mitigation department for assistance, you might be lost in the shuffles. The loan modification process is much easier with the help of an experienced bankruptcy attorney. An attorney understands all the strategies used to help numerous people modify their loan terms.
If you seek to extend the term of your mortgage loan, for instance, an attorney will help you avoid the hassle of competing with other borrowers in need of similar assistance. An attorney works for you and has your best interests at heart. An attorney will help you acquire a loan modification that works best for you.
Extension of Loan Term and Refinancing
Is an extension of the loan term the same as refinancing? No, loan refinancing is distinct from an extension of the loan term. Refinancing entails replacing the existing loan with an entirely new loan. You can seek a loan refinancing to reduce the applicable interest rates to change other unfavorable loan terms. For instance, if your current loan has an unfavorable adjustable interest rate, you can refinance it to change the interest rate. You can choose to refinance your loan with the current lender, and you can also choose an alternative lender.
If you aren't creditworthy, you can't qualify for loan refinancing. It's also impossible to refinance your loan if the outstanding loan amount is more than your property's current value. Therefore, for refinancing, the value of your property should not have dropped beyond a certain point.
Unlike refinancing, extending your loan term doesn't entail taking a new loan to replace the existing loan. You don't need to attain a certain level of creditworthiness to qualify for a loan term extension. However, to qualify for a loan extension, it should be evident that you have enough money to meet the new loan installments after extending the loan term.
It's worth noting that extending the loan term could lead to higher interest rates. However, when modifying the loan terms, most lenders cooperate and give borrowers favorable deals to make the loan more affordable and prevent defaults.
Loan Term Extension During Bankruptcy
You should seek a loan modification early enough instead of waiting until you are on the verge of filing for bankruptcy. However, all isn't lost if you have already filed for bankruptcy. After filing for bankruptcy, you will enjoy an automatic stay, and you will no longer face harassment from creditors. You will be free from foreclosure and all other actions aimed at debt collection.
You can either choose to file for Chapter 7 or Chapter 13 bankruptcy, depending on your attorney's guidance. After filing for bankruptcy, most aspects of your finances will be under the bankruptcy court's control. Extending your loan term under bankruptcy doesn't work the same way as extending the loan term through loan modification.
Whether or not the bankruptcy court approves your loan term extension will depend on whether you file for Chapter 7 or Chapter 13 bankruptcy. If you seek a loan modification under Chapter 7 bankruptcy, the lender may request court approval. Court approval is mandatory while filing for Chapter 13 bankruptcy, irrespective of whether you seek an extension of your loan term or not. If you decide to modify your loan term after filing for bankruptcy, your bankruptcy attorney must file a motion and seek the bankruptcy court's approval for a loan modification.
Modifying Your Loan Under Chapter 13 Bankruptcy
You will have a chance to propose a loan repayment plan if you decide to file for bankruptcy under Chapter 13. Under Chapter 13 bankruptcy, you will make payments to a trustee, and the trustee distributes the money to your creditors who have filed valid claims. Your loan repayment plan under Chapter 13 must include certain obligations like child support, alimony payments, and past-due taxes. The repayment plan may also include secured loans like car loans and mortgages.
Loan Modification Under Chapter 7 Bankruptcy
If you file for Chapter 7 bankruptcy, you aren't assured of saving your property like in Chapter 13 bankruptcy. Chapter 7 bankruptcy involves liquidating the borrower's assets to pay the creditors. However, you can still apply for a loan modification even after filing for Chapter 13 bankruptcy. The law doesn't prohibit you from modifying your loan as long as the lender approves. Whether the modification is approved or not will solely depend on the lender's discretion, most lenders may prefer to wait until they know whether your property will be disposed of before they approve the loan modification.
After filing for Chapter 7 bankruptcy, the period from when you file for bankruptcy to when you receive a discharge will last between 4 and 6 months. All your property will be in the bankruptcy estate during this period. You will not have full control over your property during this period. Instead, you will share the control over your property with a bankruptcy trustee. Immediately you file for bankruptcy under Chapter 7, the court appoints a bankruptcy trustee.
You won't be able to take certain actions like encumbering the property, selling it, or modifying the mortgage without first seeking the court's approval if a property is part of the bankruptcy estate. The bankruptcy trustee will use their discretion to determine whether they should sell your property to settle the loan. In some instances, the bankruptcy trustee might decide that it's not worth selling your property to pay your creditors.
If the bankruptcy trustee decides that it's not worth it to dispose of your property, the court will no longer be in control of your property. The bankruptcy trustee has to file a notice with the court to abandon the property. You will assume control over the property once the trustee abandons it and releases its control back to you. As long as the bankruptcy court and the bankruptcy trustee aren't in control of your property, you can apply for a modification of your loan term by the lender.
If the trustee decides to dispose of your property to repay your creditors, you can't apply for a loan modification. While filing for Chapter 7 bankruptcy, you can protect or exempt some property to prevent its disposal during bankruptcy. The bankruptcy court won't have control over your exempt property. You could also choose to protect the equity of your property up to a certain percentage.
If the Bankruptcy Trustee Takes Long to Decide
It's important to note that when filing for bankruptcy under Chapter 7, the bankruptcy trustee may take a long time to decide whether to dispose of your property or not. You can contact your lender and request a loan modification as you wait for the bankruptcy trustee to decide. The lender may send a request to your bankruptcy attorney and instruct you to apply for a loan modification.
Some lenders might be willing to modify your loan before the bankruptcy trustee abandons your property. You can file a motion through your bankruptcy attorney and request the bankruptcy court to approve your loan modification. Your attorney can also negotiate with the bankruptcy trustee and request them to abandon your property and allow you to seek a loan modification.
You should not apply for an extension of your loan term if the bankruptcy trustee has already decided to dispose of your property. Many lenders won't be willing to discuss a modification if they anticipate disposal of your property under Chapter 7 bankruptcy.
Loan Modification Before Filing for Bankruptcy
If you intend to file for bankruptcy and still seek a loan modification, you might be in a dilemma, wondering which should come first. Should you first file for bankruptcy or apply for a loan modification? If you have already initiated the loan modification process, it is advisable to first complete the process before filing for bankruptcy. If you file for bankruptcy before completion of the loan modification process, you may interrupt the process. The lender may require you to restart the loan modification process.
When you file for Chapter 7 bankruptcy, an automatic stay commences, and the lender must stop all forms of negotiations with the borrower, including the loan modification negotiations. The lender can't continue with the modification until they receive an authorization letter from your bankruptcy attorney. After receiving the authorization letter from your attorney, the lender must restart the modification process.
Modifying the Loan Term – Stages Involved
You have to work hand-in-hand with the lender when seeking an extension of your loan term. The steps involved are:
Application for a Loan Modification
Application for a loan modification is the first step when seeking an extension of your loan term. Most lenders will request proof that you have the financial capability to meet the new loan installments after a loan modification. Some lenders may also request your credit report.
However, in most cases, a credit report isn't a requirement when applying for your loan term extension. Usually, lenders request a credit report to determine whether you have existing loan facilities with other lenders. A lender will gauge if you will manage to repay the loan after modification depending on your outstanding debts.
Trial Monthly Installments
Making trial payments is the second step in the loan modification process. At this stage, the lender is confident that the borrower will afford the new loan installments. You have completed all the necessary paperwork and submitted all the required documents by this stage. The lender might give you a chance to pay several loan installments under the new loan term. If the borrower fails to honor the payments as expected, the lender may withhold the loan modification approval. If the borrower makes all the payments on time, it's clear that the borrower will afford the monthly loan installments after the modification.
The Lender's Decision
The decision is the next step after the trial loan payments. The lender will decide to approve your loan term if you make the trial payments successfully.
Several factors will determine whether you qualify for a loan modification or not. One such factor is whether the creditor/lender is a bank, a mortgage company, or an institution like Fannie Mae or Fannie Mac. Each institution has distinct criteria for loan modification qualification. You are more likely to qualify for a modification of your loan term if:
- You are in danger of default or delinquency after experiencing a change in your financial circumstances.
- You are struggling to repay your mortgage loan, and you can't qualify for refinancing.
- A significant percentage of your monthly earnings, more than 31%, cater for housing costs like mortgage payment, property taxes, and homeowners' association dues.
- The value of your property has declined over time, and you owe the lender more money than your property value. If the loan owing is more than the property value, you can't qualify for loan refinancing.
Find a Los Angeles Bankruptcy Attorney Near Me
Extending your loan term is a viable loan modification option if you are struggling to meet your monthly loan payments. A loan term extension can help you prevent a default and foreclosure. If you need reliable legal guidance on how to extend your loan term, the Los Angeles Bankruptcy Attorney can assist. Contact us at 424-285-5525 and speak to one of our attorneys.