About the Author:  This article was written by Jesse Aschenberg, who is the managing attorney of the Bankruptcy Law Professionals of Colorado. Mr. Aschenberg has been helping consumer bankruptcy clients since 2002 and has extensive experience in the Chapter 13 Bankruptcy area and has worked on hundreds of Chapter 13 cases both as counsel for consumers and for the Chapter 13 Bankruptcy Trustee.

Loan Modifications: 
Why a modification won’t be the cure for your financial crisis.

Fact: You Must Typically Be Three Months Behind On Your Mortgage To Get Help From Your Lender.  According to experts, “Ironically, many lenders don’t consider borrowers as troubled or start foreclosure proceedings until homeowners have missed three mortgage payments.”[i]

If your mortgage lender is willing to negotiate, you have 2 options: a voluntary repayment plan or a loan modification. 

In a voluntary repayment plan the lender allows you time to make up missed payments. This can be a viable options only if your crisis was caused by a temporary drop in income (like unemployment) and your income is now back up to a point to where you can pay your regular payment and a portion of the missed payments every month.

The more effective option is a modification of your mortgage loan. A mortgage loan modification (commonly referred to as a “loan modification”) is where the lender actually rewrites the terms of the loan by (1) freezing or lowering interest rates; (2) extending the terms of the loan; and/or reducing the amount owed on the loan.[ii] Put another way, “A Loan Modification is a permanent change in one or more of the terms of a mortgagor’s loan, allows the loan to be reinstated.”[iii]

Fact: The Majority Of Mortgage Modifications Are Not Working. According to the US Comptroller of the Currency, “53% of borrowers who had their mortgages modified in the first half of 2008 were already at least two months delinquent again.”[iv]  

Fact: Most Modifications Don’t Reduce Monthly Payment Amount. It is not uncommon for the lender to add all the past-due payments to the principal amount of the loan and also not modify the interest rate.[v] Lenders who modify loans are typically not reducing interest rates and missed payments are being added to the principal amount of the loan.[vi]

Fact:  Beware Of The Loan Modification Scam Artists. “With more and more borrowers in trouble, loan modification scams have become more common. Scammers have a larger pool of potential victims, so the easy money is getting easier. Some scour public records to find borrowers who are already in trouble, and they call offering bogus services. At best, these scams can mess up your credit and make it difficult to get a real loan modification. At worst, you’ll lose thousands of dollars in fees along with your home.”[vii]

Fact: Unless Your Loan Modification Reduces Your Monthly Payment Substantially, Chances For Success Are Grim. In order to get a lower monthly payment the lender must modify your mortgage to reduce your interest rate or reduce the principal amount of the loan or both. [viii]

Short Sale:
Selling Your Home to Avoid Foreclosure

Fact: A “short sale” can be a viable option for homeowners in financial crisis. The term “short sale” derives from circumstances where the loan balance is greater than the value of the property and the borrower is unable to A) comply with required payment terms B) refinance the property or C) pay off the loan from other assets and the proceeds from the sale of the property are insufficient to pay off the outstanding loan balance. Hence, the payoff amount is “short”.[ix]

In order to have a successful short sale, the following events are required: (A) a seller who is unable to comply with the loan terms or to refinance and who is willing to go through the short pay process (B) a loan in default, (C) an acceptable offer to purchase the property and (D) a buyer willing to wait through the uncertainty of the short sale.

Fact: A short sale is not a guarantee that you will realize less damage to their credit rating and for a shorter period of time than in the case of a foreclosure.

Chapter 13 Bankruptcy: 
The Foreclosure-Stopping-Heavy-Weight-Champion

What is a Chapter 13 Bankruptcy?  “A chapter 13 bankruptcy (also called a wage earner's plan) enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years.”[x]  “Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors.”[xi]

Fact:  Chapter 13 Can Help You Save Your Home.  “Chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan on time”[xii]

Fact: Chapter 13 Stops the Foreclosure Process Instantly.   Unlike a short sale or loan modification there is no persuading the mortgage company to push back the sale date of your home.  The bankruptcy code has an enormously strong injunction called the Automatic Stay (11 USC sec 362) that automatically stops the foreclosure process the second your case is filed with the bankruptcy court. 

Fact: In Chapter 13 There Is No Long Approval Process With Your Mortgage Lenders To See If They’ll Work With You.    Frequently in a loan modification or short sale process you must convince your mortgage lender to work with you.  We’ve seen these take months with some of our clients only for their loan modification or short sale to be denied by the lender just days before the scheduled sale of their home.  Not so under Chapter 13.  Your lender is required by law to stop the foreclosure, provide the exact amount of your past-due payments and give you the opportunity to repay them (typically at no interest) over 3-5 years. 

Fact: Under Chapter 13 Homeowners Can Remove Your 2^nd And 3^rd Mortgages.  If your home is worth less then the pay-off balance of your 1^st mortgage, you can “strip” off your 2^nd and 3^rd mortgages in a Chapter 13 with one simple motion.  Just imagine not having to pay on your 2^nd and 3^rd mortgages any more.  It sounds too good to be true, but it is.[xiii]

Fact: Under Chapter 13 Homeowners Can Remove Judgment Liens from Their Home.  If you’ve been sued and have a judgment against you chances are good there are judgment liens on your home.  Judgments liens will make it difficult to sell or re-finance your home.  If you have less than $60,000 in equity in your home, they can be removed in a Chapter 13 bankruptcy.  

Fact:  In Chapter 13 You Keep Everything You Own.  In Chapter 13 you remain in possession and control of your property (house, cars, musical instruments, bank accounts, tax refunds, jewelry…).  Unlike chapter seven where you would be required to possibly turn over your valuable assets to the bankruptcy trustee to be sold for the benefit of your creditors.

Fact:  Chapter 13 Will Eliminate Your Other Debts Too.  Your chapter 13 reorganization plan can handle your other debts too.  In fact, in the vast majority of cases homeowners who file chapter 13 eliminate all their other debts (except student loans or back child support). 

Fact: In Chapter 13 You Will Have No Direct Contact With Your Creditors.  Your creditors cannot contact you directly but must go through the proper channels of the bankruptcy system and your attorney …. or they will get sued.  Just imagine no more collection calls, threatening letters or law suits. 

Fact: Chapter 13 Bankruptcy Is an Affordable Solution to Stop Foreclosure for Many People, especially when compared to the possible loss of your home. The cost of Chapter 13 bankruptcy may even be less than the costs to refinance or take out a second mortgage, which usually involves significant points, fees and closing costs, as well as a higher interest rate on the new loan.[xiv]

Fact: A Chapter 13 Is Better Then Foreclosure On Your Credit Report:  “A foreclosure appearing on your credit report may undermine your ability to purchase a house more than a Chapter 13 bankruptcy filing. If your circumstances change, the possibility of refinancing your mortgage after you have gotten back on track with your Chapter 13 bankruptcy plan is a real possibility for many homeowners.”[xv]