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Is your home in foreclosure? Have you been dealing with the mortgage company for months trying to get a loan modification that can resolve the issue? Does the mortgage company seem to be dragging its feet, asking you for the same documents over and over again and yet you seem no closer to actually completing anything? Now it seems all of a sudden there has been notice of a Trustee/Sheriff sale. You worry There is an option that will save your home and enable you to continue working while still receiving a loan modification. That option is Chapter 13 bankruptcy. Chapter 13 will now close the sale and give you a repayment plan, completing which will put you where you need to be with your mortgage (your mortgage will be turned over). Filing Chapter 13 doesn’t mean loan modifications aren’t possible, but if you’ve already started, you’ll have to start over. However, this time there will be no risk of losing your home. If, on the other hand, you are surrendering the home, you still have the option of proceeding during bankruptcy.
When you file a case and the sale is foreclosed, you can restart loan modification proceedings 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 check for eligibility for a HAMP loan modification, an interior modification, eligibility for a shortsale, and eligibility for a deed-in-lieu of foreclosure, and potentially eligibility for a down payment. This post will explore all those options and additional loan mode options apart from HAMP.
After you’ve received a loss mitigation package, it’s important to make sure you have all the requested paperwork together before sending it to the mortgage company or servicer. They will typically ask you for 2-3 months of bank statements, signed and dated Dodd-Frank certification, copies of your most recent pay stubs for 3 months or more from 2 pay periods, signed and dated Form 4506-T Will ask for Your phone number and filled out correctly, copies of your last two years’ taxes, and a hardship letter. Many of them are self-explanatory, some of them probably unfamiliar. The Dodd-Frank certification only needs to be signed and dated, no big deal. Form 4506-T must be completed completely or your loss mitigation application process will be delayed for months. You really need to check with your attorney to make sure you’re filing this correctly. Generally, you need to fill out the top completely, select the type of tapes you want them to send to the mortgage company, you need to list the years you want to send them, This is generally 3 years and they generally want the date eg the format should be 12/31/2012, 12/31/2013, 12/31/2014. You will then need to sign it, date it, and put your phone number next to the signature line. As for the hardship letter, it should indicate why you started falling behind on your mortgage, and when or why that hardship ended so that you can make some 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 under-reporting their income/over-reporting their expenses. Keep in mind that part of the process, if you are looking to modify the loan, is that the modification review must go through underwriting. This means they will check to see if you will be able to afford the new payment they may offer. If you cannot show that you will be able to make the payments, you will not be offered a loan modification.
The bank can or will offer different types of loan modifications depending on whether they have offered you loan modifications in the past. HAMP stands for Home Affordable Modification Program. This is a program that was established after 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 amendments offered more than once per loan. HAMP modifications can reduce the principal balance, they can lower the interest rate, they can reprice the loan (stretch out your loan) over a longer period of time, or they can help you get a lower loan. There are many things you can do to help make these payments. Offers that involve principal deductions usually have certain criteria that you must meet to ensure that the principal is actually forgiven. If you fail to meet these criteria, the forgiven principal amount will come back. Generally, you will need to ensure that the loan is in good standing on the first, second and third anniversary of the effective date of the trial period. 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 may offer is an internal modification. For in-house loan mode, lenders are not bound by the requirements of HAMP. They may even 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 your current one. Unfortunately, you may find that the amendment proposal is not to your liking. Maybe it doesn’t reduce the interest rate much, or maybe it adds 10 years onto your loan and you don’t find that palatable. As long as you continue through your Chapter 13 bankruptcy, you will discharge it with your original debt on the original terms and on time according to the original payment schedule. (There are some minor caveats about this that you should ask your lawyer about.)
Another option is to ask for a smaller payment if the modification doesn’t work. Essentially, you are asking the lender/servicer to settle the balance for less than the amount owed. I’ve seen downpayments between 10% and 33%, so there are some incredible options if your lender determines you qualify. You’ll need to talk to your tax attorney/accountant to see if you’ll need to pay income tax on the loan forgiven.
Short-Sale, Deed-in-Lieu – What if you decide you really don’t want the property anymore? In that case, you have a few options. Merely surrendering the property in bankruptcy is not enough. If you simply surrender the property in bankruptcy and then the mortgage creditor sits on its rights and does not proceed to complete the foreclosure process, you will be stuck with liability on the property if someone is injured or has a housing code violation. . To avoid this, you can try short selling. A short sale is potentially available where you have an underwater home. If there is only one lien on the property, you are more likely to complete a short sale. The more liens there are, the more parties have to be satisfied with the offer of sale. The same goes for deed-in-lieu. A deed-in-lieu is short for deed-in-lieu of foreclosure, where you don’t sign over the property to the mortgage creditor, instead signing over the property over. This could potentially save the banks a lot of money and you get the benefit of being relieved of any liability from continued 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.
Best wishes,
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