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HOME LOAN MODIFICATION VERSUS BANKRUPTCY


1. Home Loan Modification

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With the advent of the Home Affordable Modification Program (HAMP), there was the hope and expectation of delinquent borrowers being able to keep their home.

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However, it has been my perception (as well as many other bankruptcy attorneys) that only a small percentage of attempted home loan modifications are ultimately approved.  Even when loan modifications are “approved”, they often seem to not provide much, if any, benefit to the homeowners.  

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Rather, what appears to frequently occur is that homeowners are sometimes advised and encouraged to stop paying the mortgage.  Alternatively, they are instructed by the lender to pay a lower amount (called a “trial modification”) for a period of a number of months.  Then, after the trial modification, instead of being given a permanent modification, they are frequently denied the help that they were looking for.  As a result, they now owe multiple months of back mortgage payments.  Often the delinquency was caused by the reduced payment “trial” suggested by the lender!  Then, they are informed that if the past due payments are not brought current soon, their home will be foreclosured upon!

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Many believe that for most borrowers, HAMP provides a largely false hope.  For example, there have been reports that less than 10% of individuals are approved for a HAMP loan modification.  In October, 2009, an oversight panel created by Congress reported that less than 2,000 out of 500,000 homeowners who had been offered trial modification had been given permanent modifications to their mortgages.

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It should be noted that I do hear on occasion of loan modifications that are approved and do benefit the consumer.  Furthermore, bank and lenders change their policies from time to time.  Therefore, I do not seek to discourage you from exploring or attempting the loan modification path.

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2. Modifications through Negotiation

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Sometimes, a debtor, usually with representation by legal counsel, can favorably renegotiate the terms of the loan by presenting a claim or lawsuit against the lender alleging violation of lending law (predatory loans, fraud, wrongful foreclosure, illegal provision in the loan agreement, etc.).  However, such approach may be too expensive for some to pursue due to the amount of attorney’s fees and costs involved.  Further, loan modification scams appear to have abounded in the past several years. Therefore, due diligence and cautious prudence should be exercised in selecting an attorney that is reputable, ethical, experienced, knowledgeable and skilled in advising and handling this type of endeavor.  One favorable characteristic to look for is when the attorney recommends (and has a practice of utilizing) a loan audit by a skilled professional to look for violations of lending law in the loan agreement.

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3. Bankruptcy

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    Chapter 7 Bankruptcy:

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Other options for the delinquent borrower include filing a Chapter 7 bankruptcy, which discharges the debt but still allows the lender to ultimately foreclose the home.  On the other hand, sometimes by discharging other debts such as credit cards, people are able to work out a repayment plan with the lender due to more funds being available for that purpose.

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Sometimes, after discharge, the lender of a 100% undersecured junior loan (2nd mortgage or trust deed, HELOC, etc.), called a "worthless security," is willing to negotiate a substantially reduced payoff amount or other reduced settlement of the mortgage debt.

    

    Chapter 13 Bankruptcy:

Additionally, a person may qualify to file a Chapter 13 bankruptcy and pay the past due obligations.  In other words, a debtor may cure the loan default by making up the missed back payments by means of a Chapter 13 plan.  After the plan is approved by the bankruptcy court, the creditors must abide by the plan. 

Thus, a Chapter 13 bankruptcy offers the debtor an opportunity to keep the home.  This is accomplished by making the current mortgage payments that become due.  Further, the debtor eventually brings the loan current by making up missed back payments. 

Further, in certain qualifying cases, in a Chapter 13 the court allows a second mortgage to be stripped.  By stripping the second mortgage, it becomes a low priority unsecured debt and is repaid over a 3 to 5 year period, and often for far less than the amount that was owed.  Upon the successful completion of the Chapter 13 plan, remaining balance owed of the second mortgage is forever discharged (wiped out, forgiven).

For a free and confidential consultation, contact southern California Christian bankruptcy lawyer Matthew B. Tozer.

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