The intersection of bankruptcy and loan modifications, also known as loss mitigation

Is your house in foreclosure? Have you been working with the mortgage company for months trying to get a loan modification that could solve the problem? Does the mortgage company seem to be dragging their feet, asking you for the same documents over and over again, and yet they don’t seem to be getting any closer to achieving anything? Now, seemingly out of the blue, there has been a notice of sale from the Receiver/Sheriff. You panic. There is an option that will save your home and allow you to continue working toward a loan modification. That option is a Chapter 13 bankruptcy. Chapter 13 will stop the sale now and give you a payment plan that, if you complete it, will put you right where you need to be with your mortgage (your mortgage will catch up). Filing for Chapter 13 does not mean that loan modifications are not possible, but if you had already started, you will likely have to start over. This time, however, there will be no threat of losing your home. If, on the other hand, you are giving up the house, there are still options you should pursue while in bankruptcy.

After you file your case and stop the sale, you can restart your loan modification procedures by requesting a loss mitigation package from your lender or servicer. When you do this, they usually send a “waterfall” packet. This is an application that would verify eligibility for a HAMP loan modification, internal modification, eligibility for a short sale and eligibility for a deed-in-lieu of foreclosure, and possibly eligibility for a short payment. This post will explore all of those options and additional loan modification options in addition to HAMP.

After you receive your loss mitigation package, it’s important to make sure you have all the requested documentation before you send it to the mortgage company or servicer. Typically, they will ask for 2-3 month bank statements, a signed and dated Dodd-Frank certification, copies of your most recent pay stubs from 2 pay periods to 3 months or longer, a signed Form 4506-T and dated with your phone number and completed correctly, copies of your last two years of taxes and a hardship letter. Some of them are self-explanatory, some of them are probably unfamiliar. The Dodd-Frank Certification only needs a signature and date, no problem. Form 4506-T must be completed perfectly or your loss mitigation application process will be delayed for months. You really need to check with your attorney to make sure you are filing it correctly. In general you need to fill out the top completely, select the type of transcripts you want them to send to the mortgage company, you need to list the years you want them to send, it’s usually 3 years and they usually want the date formatted to be 12/31/ 2012, 12/31/2013, 12/31/2014 for example. You must then sign it, date it, and put your phone number next to the signature line. As for the hardship letter, you must state why you began to fall behind on your mortgage and when or why those hardships ended or ended so that you can make any future payments.

Part of the application process also requires you to fill in your household income and expenses. A common mistake people make is underreporting their income or overreporting their expenses. Keep in mind that part of the process, if you want to modify the loan, is that the review of the modification must go through the underwriting. That means they’ll check to see if you’ll be able to afford the new payment they can offer. If you cannot show that you will be able to make the payment, you will not be offered a loan modification.

The different types of loan modifications that the bank can or will offer will depend on whether you have ever been offered a loan modification in the past. HAMP stands for Home Affordable Modification Program. It is a program that was created as a result of the subprime mortgage crisis. Typically, you only receive one HAMP loan modification offer per loan. However, this is not a hard and fast rule, and I have seen HAMP modifications offered more than once per loan. HAMP modifications can lower your principal balance, lower your interest rate, repay the loan over a longer period of time (stretch your loan), or do a number of these things to help you get a lower loan. pay. Offers that include a principal reduction will generally have certain benchmarks that you must meet to ensure that the principal is actually forgiven. If you do not meet these benchmarks, the pardoned principal will return. In general, you’ll need to make sure the loan is current on the first, second, and third anniversary of the effective date of the trial period. The amount by which the principal is reduced will generally not be treated as taxable income. Talk to your tax attorney or accountant for more information on this. Another type of loan modification that your mortgage lender may provide is an internal modification. For an in-house loan mod, lenders are not subject to HAMP requirements. They may also offer them even if they determine that you are not eligible for HAMP. The results may not be as good, but they should still be better than what you currently have. Unfortunately, the modification offer may not be to your liking. Maybe it won’t reduce the interest rate much, or maybe add 10 years to your loan and you won’t find it acceptable. As long as you continue with your Chapter 13 bankruptcy, you will finish it with your original loan intact on the original terms and on time according to the original repayment schedule. (There are a few small caveats about this that you should ask your lawyer about.)

Another option if the modification doesn’t work is to ask for a short payment. Essentially, you are asking the lender/servicer to pay off the remaining balance for something less than what is owed. I’ve seen short payments anywhere from 10% to 33%, so there are some amazing options out there if your lender determines you qualify. You will need to talk to your attorney/tax accountant to see if you will have to pay income taxes on the forgiven debt.

Short Sale, Deed-in-lieu – What happens if you decide you no longer want the property? In that case, you have a couple of options. Simply surrendering the property in bankruptcy is not enough. If you simply surrender the property in bankruptcy and then the mortgagee sits on their rights and doesn’t move to complete the foreclosure process, you will have liability for the property if someone is injured or for housing code violations. To avoid this, you can try doing a short sale. A short sale is potentially available when you are underwater on the house. If there is only one bond on the property, you are much more likely to get a short sale. The more links there are, the more parties will have to be satisfied with the sale offer. The same goes for a deed in place. A deed-in-lieu of foreclosure is where you give the property to the mortgagee in exchange for them not foreclosing on the property. This can potentially save banks a lot of money and has the benefit to you of ridding yourself of any liability for continued home ownership.

If this sounds like you, just know that help is available. Contact a local bankruptcy attorney with experience in this field for help.

Best of luck,