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 to try to get a loan modification that could fix the problem? Does the mortgage company seem to be stalling by asking you for the same documents over and over, but you don’t seem any closer to getting anything done? Now, seemingly out of the blue, there is a notice of the trustee/sheriff’s sale. You panic. There is an option that will save your house and allow you to continue working on getting a loan modification. This option is Chapter 13 bankruptcy. Chapter 13 will stop the sale now and give you a repayment plan that, if you follow through, will put you right where you need to be with your mortgage (your mortgage will become current). Filing for Chapter 13 doesn’t mean loan modifications aren’t possible, but if you’ve already started, you’ll probably have to start over. This time, however, there will be no threat of losing your home. If, on the other hand, you are surrendering the home, there is still an option to pursue while in bankruptcy.
After you file the lawsuit and the sale is stopped, you can restart the loan modification process by requesting a loss mitigation package from the lender or servicer. When you do this, they usually send a “waterfall” package. This is an application that will verify your eligibility for a HAMP loan modification, internal modification, short sale eligibility, and deed in lieu of foreclosure eligibility and possibly short payoff eligibility. This post will explore all of these options and additional loan options other than HAMP.
Once you receive your loss mitigation package, it’s important to make sure you have all the necessary paperwork together before you send it to the mortgage company or servicer. Typically they will ask you for 2-3 months of bank statements, a signed and dated Dodd-Frank certification, copies of your most recent pay stubs for 2 pay periods up to 3 months or more, a signed Form 4506-T and dated with your phone number and filled out correctly, copies of your taxes for the last two years and a hardship letter. Some of them are self-explanatory, some of them are probably unknown. The Dodd-Frank certification just needs to be signed and dated, no big deal. Form 4506-T must be completed perfectly or the loss reduction application process will be delayed for months. You really should check with your attorney to make sure you’re filling it out correctly. Generally you have to fill out the top completely, select the type of transcripts you want them to send to the mortgage company, you have to specify the years you want them to send, usually 3 years and they usually want the date format to be 12/31/2012, 12/31. 2013, 31.12.2014 for example. You then need to sign it, date it, and put your phone number next to the signature line. As for the hardship letter, it should state why you started falling behind on your mortgage and when or why those hardships are or have ended so that you can make some kind of payment in the future.
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 / overreporting their expenses. Note that part of the process if you want to modify the loan is that the modification review must go through a signature. This means they will check whether you will be able to afford the new payment they can offer. If you cannot prove that you will be able to make the payment, 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 they have offered you a loan modification in the past. HAMP stands for Affordable Home Modification Program. This is a program that was created after the subprime crisis. You usually only get one HAMP loan modification offer per loan. However, this is not a hard and fast rule, and I have seen HAMP mods offered more than once on loan. HAMP modifications can reduce the principal balance, can lower the interest rate, can refinance the loan over a longer period of time (extend your credit), or can do several of these things to help you get a lower loan payment. Offers that include principal reduction usually have certain benchmarks you must meet to make sure the principal is truly reduced. If you fail to meet these benchmarks, the forgiven principal will return. Generally, you’ll need to make sure the loan is in good standing on the first, second, and third anniversaries of the trial’s effective date. 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 matter. Another type of loan modification that your mortgage lender may provide is an in-house modification. For an in-house loan model, lenders are not bound by HAMP requirements. They may also offer these even if they determine you are not eligible for HAMP. The results may not be as good, but they should still be better than what you have now. Unfortunately, you may find that the modification offer is not to your liking. Maybe it doesn’t lower your interest rate much, or maybe it adds 10 years to your loan and you don’t feel good about that. As you proceed through your Chapter 13 bankruptcy, you will complete it with the original loan intact under the original terms and on time according to the original payment schedule. (There are some small caveats to this that you should ask your lawyer about.)
Another option if the mod doesn’t work is to ask for a short payout. Essentially, you are asking the lender/servicer to settle the remaining balance for something less than what is owed. I’ve seen down payments between 10% and 33%, so there are some amazing options if your lender decides you qualify. You will need to speak with your tax attorney/accountant to see if you will have to pay income tax on debt forgiveness.
Short Sale, Deed – What if you decide you really don’t want the property anymore? In that case, you have several options. Simply handing over the property in bankruptcy is not enough. If you simply surrender the property in bankruptcy and then the mortgagee asserts its rights and does not take action to complete the foreclosure process, you will be left with 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 home. If there is only one lien on the property, you are much more likely to short sell. The more liens there are, the more parties must be satisfied with the sale offer. The same applies to a notarial deed. A deed, short for a foreclosure deed, is when you sign over the property to the mortgage lender in exchange for them not foreclosing on the property. This can potentially save the banks a lot of money and has the benefit for you of getting rid of any liabilities from continuing to own the home.
If this sounds like you, just know that help is available. Contact a local bankruptcy attorney with experience in this area to help you.
best of luck,
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