The Intersection of Bankruptcy and Loan Modifications Aka Loss Mitigation
Is your house in foreclosure? Have you been working with the mortgage company for months to try to get a loan modification that could solve the problem? Does the mortgage company seem to slow down and ask you for the same documents over and over and yet you don’t seem any closer to actually achieving anything? Now apparently there was a notice of the trustee/sheriff’s sale. You panic. There is an option that will save your home and enable you to continue working for a loan modification. That option is Chapter 13 bankruptcy. Chapter 13 will stop the sale now and give you a payment plan that if completed will put you where you need to be with your mortgage (your mortgage will become effective). Filing Chapter 13 doesn’t mean loan modifications aren’t possible, but if you’ve already started, you’re likely to start over. But this time there will be no risk of losing your home. On the other hand, if you are giving away the house, there is still a choice that you will have to make while you are in bankruptcy.
After the lawsuit is filed and the sale is stopped, you can restart the loan modification process by requesting a loss mitigation package from your lender or service provider. In doing so, they usually send a “waterfall” packet. This is an app that will check eligibility for a HAMP loan modification, internal modification, eligibility for a short sale, eligibility for a deed in lieu of a lien, and possibly eligibility for a short reward. This post will explore all of these and additional loan modification options other than HAMP.
After you receive your loss mitigation package, it is important to make sure you have all of the required paperwork together before you send it to the mortgage company or service provider. They will generally require you to have two to three months worth of bank statements, a signed and dated Dodd-Frank Affidavit, copies of your most recent pay stubs for 2 to 3 months or more pay periods, a signed and dated Form 4506-T your phone number and properly filled in, and tax copies The last two years, the letter of hardship. A number of these are self-explanatory, and some are perhaps even more uncommon. Dodd-Frank’s certificate only needs to be signed and dated, no big deal. Form 4506-T must be filled out perfectly or the process for filing your loss relief application will be delayed for months. You really need to check with your attorney to make sure you are filing it correctly. Generally you need to fill out the top completely, select the type of records you want to send to the mortgage company, you need to list the years you want them to send, generally they are 3 years and they generally want the format date to be 12/31/2012, 12/31/ 2013, 12/31/2014 eg. You then need to sign and date it and put your phone number next to the signature line. As for the hardship letter, it should explain why you are late on your mortgage, and when and why that hardship ended or ended so that you can make some payments in the future.
Part of the application process also requires filling in your household income and expenses. A common mistake people make is underreporting their income/overreporting their expenses. Keep in mind that part of the process, if you are seeking a loan modification, is that the modification review must go through an underwriting. This means that they will check to see if you will be able to afford the new payment that they are able to offer. If you cannot prove your ability to repay, you will not be offered a loan modification.
The different types of loan modifications that a bank can or will offer will depend on whether you have been offered a loan modification in the past. HAMP stands for Affordable Home Modification Program. It is a program created in the aftermath of the subprime mortgage crisis. Generally, you only receive one HAMP loan modification offer per loan. This is not a hard and fast rule, however, as I have seen HAMP modifications offered more than once per loan. HAMP adjustments may reduce the principal balance, they may reduce the interest rate, they may repay the loan over a longer period of time (extending your loan), or they may do a number of these things to help you get a lower premium loan. Offers that include a prime cut will usually have certain criteria that you must meet to ensure that the principal is truly forgiven. If you fail to meet these criteria, the forfeited principal will be returned. In general, you’ll want to make sure that the loan is in good standing on the first, second, and third anniversaries of the effective date of the trial period. In general, the amount by which principal is reduced will not be treated as taxable income. Speak to a tax attorney or accountant for more information on this matter. Another type of loan modification that your mortgage lender may offer is an internal modification. For an in-house loan, lenders do not adhere to HAMP requirements. They can also provide it even if they determine that you do not qualify for HAMP. The results may not be good but they should be better than what you currently have. Unfortunately, you may find that the edit offer is not to your liking. Maybe he doesn’t lower the interest rate too much, or he may add 10 years to your loan and you don’t find that palatable. As long as you continue with your Chapter 13 bankruptcy, you will finish your original loan intact, under the original terms, and on time according to the original payment schedule. (There are a few small caveats you should ask your attorney about.)
Another option if the adjustment doesn’t work is to ask for a short bonus. Essentially, you are asking the lender/service provider to settle the remaining balance for something less than owed. I’ve seen short term earnings of between 10% and 33% so there are some amazing options if your lender decides you qualify. You will need to speak to your tax attorney/accountant to find out if you will have to pay income tax on the debt that is exempt.
Short Sale, Substitute Deed – What if you decide you don’t really want the property anymore? In this case, you have two options. Simply giving up property in bankruptcy is not enough. If you simply surrender the property in bankruptcy and then the mortgage creditor sits on their rights and doesn’t move to complete the foreclosure process, you’ll be stuck with liability on the property if anyone is injured or due to housing code violations. To avoid this, you can try to do a short sale. A short sale is likely to be available where you are underwater in the house. If there is only one lien on the property, you are more likely to do a short sale. The more liens, the more satisfied the parties are with the offer to sell. The same goes for the verb instead of. A replacement deed, which is short for a mortgage replacement deed, is where you sign the property over to a mortgage creditor in exchange for not foreclosure on the property. This can save the banks a lot of money and is a benefit for you to get rid of any liability from continuing home ownership.
If this sounds like you, just know that there is help out there. Contact a local bankruptcy attorney with experience in this area to help you.
good luck ,
