If you are considering filing for bankruptcy, you’ve probably heard of the loan modification. Many assume it is a positive alternative to filing. If you are considering obtaining a loan modification instead of filing for bankruptcy make sure that you discuss the details with an expert before taking action.
Potential bankruptcy filers should know that the loan modification was designed for a purpose and the purpose of the loan modification is very different from the purpose of bankruptcy. The purpose of the loan modification was to aid homeowners who have experienced a drastic change in their circumstances leaving them unable to make their monthly mortgage payment. It is comparable to “hardship” programs available from many revolving credit institutions. It is a temporary solution for a lack of financial solvency.
On the other hand, bankruptcy provides the debtor with a clean slate financially. It is a permanent solution to financial crisis.
When considering the loan modification as a solution to financial crisis, know the basics:
Individuals must qualify for a loan modification. Showing that your house is underwater does not qualify you for a loan modification. Not wanting to make your monthly payment does not qualify you and indicating that you feel making the your monthly payment in the current housing market feels like throwing money out the window won’t qualify you either.
You can’t even apply for a loan modification until you are in default on your mortgage. If you’ve managed to work hard and somehow stay on top of your mortgage payment, you’ll have to stop paying it. This requires homeowners to take a huge chance. You could go into default, incur late fees & default interest, severely damage your credit score and after all that…have your application for a loan modification denied.
Additionally, the loan modification process is notoriously slow. Banks will take months to make decisions about applications.
If a loan modification is denied, your loan will be reinstated (within a few weeks). When this happens, homeowners will be required to come up with a lump sum to keep the house out of foreclosure. The lump sum will include the amount due plus late fees and additional charges from increased interest rates due to having a mortgage loan in default.
In most cases, homeowners whose loan modification applications are approved will find that their loan amount isn’t reduced. The total amount due can actually increase upon loan modification approval due to the fees associated with the default.
Homeowners who simply need help making their monthly payment should consider the loan modification, but it was not designed to make a difference in the debtor’s long-term finances. In theory, the interest rate on the mortgage can be lowered through a successful loan modification, but in most cases this doesn’t happen because rates are already fairly low.
Many individuals who choose to apply for a loan modification instead of filing for bankruptcy don’t realize the consequences until it’s too late. By the time individuals trying to obtain a loan modification for the wrong reasons realize what they’re in for, they are too far behind and end up forced into filing for Chapter 13 bankruptcy because it’s the only way to save their home.
Avoid the additional trauma delaying bankruptcy filing can cause and consult your bankruptcy professional at Westgate Law today.