Is a Loan Modification More Effective than Bankruptcy?

TRI Writer • September 24, 2020

Are you past due on your loans? Are you facing foreclosure? Countless homeowners experience similar situations every day. When you’re looking for options that can help you out of an impossible financial situation, you’ll probably eventually end up trying to figure out which is more effective – loan modification or bankruptcy? 

What is a Loan Modification?

When reality hits and there aren’t a lot of great options, homeowners can feel hopeless. They search for a solution that will get them out of their current financial trouble but fear the harm any solution may do to their financial future. One standard option that homeowners in financial trouble consider is a loan modification. A loan modification allows past due homeowners to modify their monthly payment amount, so it is in a more affordable range for their current situation. Some loan modifications add past due payments to the tail end of the loan. The danger is frequently at the end of the modification term there is a quite large balloon payment due!

The Trouble with Loan Modification for Homeowners:

When it comes to loan modifications, not every homeowner or property will qualify. Some loan modifications are through government-managed programs that carry specific eligibility guidelines. Other loan modifications are offered through private lenders who have their internal requirements and guidelines for eligibility. In some cases, internal guidelines and requirements may not be applied consistently from case to case and borrower to borrower. Additionally, investment properties may be ineligible for a loan modification since many mortgage loan modification programs only offer their protection to personal residences.

For most mortgage loan modification applicants, the process is long and complicated. Many applicants may not know if they qualify or not for months, which means months of additional past due payments. This situation may lead homeowners directly into a foreclosure, which is exactly what they were attempting to avoid. Many homeowners that come away with Loan modifications do not understand the fine print and may have created a time bomb to explode in the distant future.

Considering the Bankruptcy Alternative:

Chapter 13 bankruptcy is an excellent alternative to mortgage loan modification. Filing Chapter 13 bankruptcy when past due on your mortgage has several benefits:

  • The ability to save both residential and investment properties.
  • A pre-determined monthly payment plan allows homeowners to “catch up” on past due amounts over either 3 or 5 years.
  • The possibility of eliminating any undersecured second mortgages on residential property.
  • The ability to prioritize mortgage payments while catching up on the past due balance, and simultaneously eliminating any unsecured debts. Eliminating additional unsecured debts can free up the homeowner’s budget significantly.

If you have questions about how bankruptcy can help homeowners behind on their mortgage, we can help. Find out how to get a fresh start by filing bankruptcy. Get in touch with Ken Rannick at Kenneth C. Rannick P.C., Tennessee, and Georgia bankruptcy attorney as soon as possible.

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