Stop Home Foreclosure: Use the Bankruptcy Courts to Avoid the Mortgage Lender Run-Around
About the Author: Jesse Aschenberg is the managing attorney of Bankruptcy Law Professionals of Colorado. He has worked on hundreds of Chapter 13 cases both as counsel for consumers and for the Chapter 13 Bankruptcy Trustee.
With Loan Modifications…
- FACT: You Must Typically Be Three Months Behind On Your Mortgage To Get a Loan Repayment Plan or Modification From Your Lender. Once you have missed payments, you are subject to late fees and additional interest payments. It is difficult to make those up unless your financial situation has improved dramatically.[i]
- FACT: Most Modifications Don’t Reduce Monthly Payment Amount. It is not uncommon for the lender to add all the past-due payments to the principal amount of the loan and also not modify the interest rate.[ii] Lenders who modify loans are typically not reducing interest rates and missed payments are being added to the principal amount of the loan.[iii]
- FACT: The Majority Of Mortgage Modifications Are Not Working. According to the US Comptroller of the Currency, “53% of borrowers who had their mortgages modified in the first half of 2008 were already at least two months delinquent again.”[iv] Not surprising, really, since the modifications usually don’t address the real problem.
To compound the problem, there are now many loan modification scam artists operating in the U.S. “With more and more borrowers in trouble, loan modification scams have become more common. Scammers have a larger pool of potential victims, so the easy money is getting easier. Some scour public records to find borrowers who are already in trouble, and they call offering bogus services. At best, these scams can mess up your credit and make it difficult to get a real loan modification. At worst, you’ll lose thousands of dollars in fees along with your home.”[v]
With Short Sales…
Short sales are similarly problematic. Although a short sale can be a viable option for homeowners in financial crisis, it does not preserve your home. The term “short sale” derives from circumstances where the loan balance is greater than the value of the property and the borrower is unable to A) comply with required payment terms B) refinance the property or C) pay off the loan from other assets and the proceeds from the sale of the property are insufficient to pay off the outstanding loan balance. Hence, the payoff amount is “short”.[vi]
- FACT: A Successful Short Sale Requires All of the Following: (A) a seller who is unable to comply with the loan terms or to refinance and who is willing to go through the short pay process (B) a loan in default, (C) an offer to purchase the property that is acceptable to the lender, and (D) a buyer willing to wait through the uncertainty of the short sale. If any element is missing, the short sale will not occur.
- FACT: A Short Sale Is Not a Guarantee That You Will Have Less Damage to Your Credit Rating and for a shorter period of time than if your home was foreclosed.
Chapter 13 Bankruptcy: The Foreclosure-Stopping, Heavy-Weight-Champion
What is a Chapter 13 Bankruptcy? “Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors.”[vii]
- FACT: Chapter 13 Can Help You Save Your Home. “By filing under this Chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan on time”[viii].
- FACT: Chapter 13 Stops the Foreclosure Process Instantly. Unlike a short sale or loan modification there is no persuading the mortgage company to push back the sale date of your home. The bankruptcy code has an enormously strong injunction called the Automatic Stay (11 USC sec 362) that automatically stops the foreclosure process the second your case is filed with the bankruptcy court.
- FACT: In Chapter 13 There Is No Long Approval Process With Your Mortgage Lenders To See If They’ll Work With You. We’ve seen these approval processes take months with some of our clients, only to have their loan modification or short sale denied by the lender just days before the scheduled sale of their home. Not so under Chapter 13. Your lender is required by law to stop the foreclosure, provide the exact amount of your past-due payments and give you the opportunity to repay them (typically at no interest) over 3-5 years.
- FACT: Under Chapter 13, Your 2nd And 3rd Mortgages Can Be Forgiven. If your home is worth less than the pay-off balance of your 1st mortgage, you can remove your 2nd and 3rd mortgages in a Chapter 13 with one simple motion. It sounds too good to be true, but it is.[ix]
- FACT: Under Chapter 13, Homeowners Can Remove Judgment Liens from Their Home. If you’ve been sued, chances are good that there are judgment liens on your home. Judgment liens make it difficult to sell or re-finance your home. If you have less than $60,000 in equity in your home, these liens can be removed in a Chapter 13 bankruptcy.
- FACT: In Chapter 13 You Keep Everything You Own. In Chapter 13 you remain in possession and control of your property (house, cars, musical instruments, bank accounts, tax refunds, jewelry…), and your debt payments are simply consolidated and restructured.
- FACT: Chapter 13 Will Eliminate Your Other Debts Too. Your chapter 13 reorganization plan can handle your other debts too. In fact, in the vast majority of cases, homeowners who file chapter 13 eliminate all their other debts (except student loans or back child support).
- FACT: In Chapter 13 You Will Have No Direct Contact With Your Creditors. Your creditors cannot contact you directly but must go through the proper channels of the bankruptcy system and your attorney–or they will get sued. Just imagine…no more collection calls, threatening letters or law suits.
- FACT: Chapter 13 Bankruptcy Is an Affordable Solution to Stop Foreclosure for Many People, especially when compared to the possible loss of your home. The cost of Chapter 13 bankruptcy may even be less than the costs to refinance or take out a second mortgage, which usually involves significant points, fees and closing costs, as well as a higher interest rate on the new loan.[x]
- FACT: A Chapter 13 Is Better Than Foreclosure on Your Credit Report. “A foreclosure appearing on your credit report may undermine your ability to purchase a house more than a Chapter 13 bankruptcy filing. If your circumstances change, the possibility of refinancing your mortgage after you have gotten back on track with your Chapter 13 bankruptcy plan is a real possibility for many homeowners.”[xi]
[ix] Michael Cheney, a Real Estate Broker in the Denver metro area.
[xiii] 11 U.S.C. 506 – Motion to Determine Secured Status.