The economy is struggling to recover, unemployment is high, and as a result there are a lot of people who default on their mortgage payments and are in danger of foreclosure. To help people save their homes, mortgage companies and the federal government are touting the benefits of loan modifications and homeowners are buying into the idea of their mortgage modification in record numbers. But before modifying a mortgage loan, homeowners should weigh the true cost of refinancing their mortgage and consider processing the mortgage arrears in a Chapter 13 bankruptcy case instead.
Loan modifications are often a lengthy process. Many of my clients who apply for a loan modification, don’t receive a response until a year after starting the process. After months of filing documents, and jumping through hoop after hoop, they often get denied their loan modification and end up filing for bankruptcy to save their home.
Modifications may include closing costs that may or may not be included in the modified loan, increasing the amount financed. In addition, once the mortgage arrears are included in the new loan, you start charging interest, so handling $10,000 in mortgage arrears could end up costing the debtor $30,000 or more over the life of the loan.
In some cases, filing for Chapter 13 bankruptcy may be a better alternative to a loan modification. In the northern area of Texas, mortgage arrears paid in Chapter 13 bankruptcy are interest-free, so the cost of handling mortgage arrears is often less than it would be with a modified loan. Most homeowners qualify for Chapter 13 bankruptcy, and the process doesn’t require a lengthy filing process.
To determine whether Chapter 13 bankruptcy or a modification is the best option, homeowners should consider whether the loan modification simply addresses mortgage arrears or whether it actually lowers the interest rate. If you lower the interest rate, the loan modification may be a better option than Chapter 13 bankruptcy because the cost of paying interest on mortgage arrears that are cured in the loan modification may be offset by the savings obtained from the interest rate reduction. However, if the interest rate remains the same and the only benefit of a mortgage refinance is to address the mortgage arrears, then the homeowner should consider whether Chapter 13 bankruptcy might be a better option.