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 solve the problem? Does it seem like the mortgage company is dragging its feet, asking you for the same documents over and over again, and yet you don’t seem to be any closer to achieving anything? Now, seemingly out of nowhere, there has been a Trustee/Sheriff’s notice of sale. 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 completed, will put you right where you need to be with your mortgage (your mortgage will catch up). Filing Chapter 13 doesn’t mean loan modifications aren’t possible, but if you’ve already started, you’ll 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 need to pursue while in bankruptcy.
After you file the case and stop the sale, you can restart the loan modification procedures by requesting a loss mitigation package from the lender or servicer. When you do this, they usually send a “cascade” 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 short payment eligibility. This post will explore all of those options and additional loan modification options besides 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 your mortgage company or servicer. They will typically ask for 2-3 months of bank statements, a signed and dated Dodd-Frank certification, copies of your most recent pay stubs from 2 pay periods to 3 months or more, a signed Form 4506-T and dated with your phone number and filled out correctly, copies of your last two years of taxes, and a letter of hardship. Some of them are self explanatory, some of them are probably unfamiliar. The Dodd-Frank Certification only needs to be signed and dated, no problem. Form 4506-T must be filled out 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 correctly. Generally you need to fill out the top part 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, usually it’s 3 years and they usually want the date format to be 12/31/ 2012, 12/31/2013, 12/31/2014 for example. You should then sign it, date it, and put your phone number next to the signature line. As for the hardship letter, it should 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 payments 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 to underreport their income or overreport their expenses. Keep in mind that part of the process, if you want to modify the loan, is that the modification review must go through underwriting. That means they will check to see if you will be able to afford the new payment they may 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 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 in the wake of the subprime mortgage crisis. You typically 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 reduce the principal balance, they can lower the interest rate, they can repay the loan over a longer period of time (stretch your loan), or they can do a number of these things to help you get a loan lower. payment. 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 fail to meet these benchmarks, the forgiven principal will return. In general, you’ll need to make sure the loan is current on the first, second, and third anniversary of the trial period’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. Another type of loan modification that your mortgage lender can provide is an internal modification. For an internal 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 you don’t lower the interest rate much, or maybe you add 10 years to your loan and you don’t find it acceptable. As long as you continue with your Chapter 13 bankruptcy, you will end it with your original loan intact on the original terms and on time according to the original payment schedule. (There are a few caveats about this that you should ask your attorney.)
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 between 10% and 33%, so there are some amazing options out there if your lender determines you qualify. You will need to talk to your tax attorney/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 does not move to complete the foreclosure process, you will have liability to the property if someone is injured or for housing code violations. To avoid this, you can try to make a short sale. A short sale is potentially available when you are underwater in 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 have to be satisfied with the sale offer. The same goes for a write-in-place. A deed-in-lieu of foreclosure is where you give the property to the mortgagee in exchange for not foreclosure. This can potentially save banks a lot of money and has the benefit for you of getting rid 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,