Submitted by Jen Jones on Wed, 11/25/2009 - 2:12pm
Should you try to modify your mortgage before filing for bankruptcy? Bankruptcy will stop foreclosure proceedings; a Chapter 13 bankruptcy will allow you to keep your home, and to develop a payment plan to meet your back payment obligations. But it won't necessarily lower your monthly mortgage payments. Is it worth it to try to modify your mortgage and secure lower payments first?
The evidence is mounting that it's probably not worth your effort. A recent report shows that although 362,348 loans have been approved for "trial" modifications, only 1,711 of those trial modifications have been made permanent. Assuming you can even get over the first hurdle of being approved for a trial modification, you're likely to get stuck in "trial mod limbo". Depending on your lender's mood on any given day, you could at any point be dropped from your trial modification, worse off than where you started.
But isn't the program backed by the government It's true, the government had high hopes for the Making Home Affordable program, designed to help homeowners who are having trouble making their payments. However, mortgage companies have dragged their feet over it; they make more money off fees when a house goes into foreclosure than they do modifying a mortgage. The government may well say you qualify for MHA, and your lender simply refuses to go along.
Faced with a recalcitrant lender, you might turn to foreclosure consultants. While there are legitimate consultants, be wary of scams. Many consultants will simply charge you a fee and never even bother to contact your lender!
You also have to consider whether or not changing the terms of your loan is in your best interest. For example, you may be qualified to refinance under the Hope for Homeowners program (H4H). However, H4H requires upfront fees and additional mortgage insurance; later, when you sell or refinance your house, you will be required to share between 50 and 100 % of the proceeds with the government.
Some lenders might agree to roll your loan into a 40-year fixed mortgage. In this case, you'd pay less per month, but for a much longer period of time. Depending on your loan amount, the additional money could be tens or even hundreds of thousands of dollars. Plus, of course, you will have payments for an extra 10 years, and less equity in the home if you sell before that. Will the difference in monthly payments make that additional debt worth it? It depends on your circumstances, of course, but possibly not. Remember, once you file for Chapter 13, much or all of your unsecured debt may be erased, freeing up more of your income for your mortgage payment.
The earlier you file for Chapter 13 bankruptcy, the more likely you are to save your home. If foreclosure proceedings have advanced enough prior to your filing, you may not be able to afford the Chapter 13 payment that is required to catch you up. If you're starting to get behind, call a bankruptcy attorney today.
While modification is still receiving a lot of hype in the press, it's becoming clear that it's all just hype. . The best way to sort through these options is with the help of a professional bankruptcy attorney. It doesn't make sense to spend weeks trying to modify your loan, only to find out it resulted in filing for bankruptcy too late.
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