When you are behind on your house and facing possible foreclosure, should you do a loan modification or bankruptcy? This is Reason “E” for filing bankruptcy.
Which is better? Loan modification or bankruptcy?
The better question is do you want to sacrifice tomorrow for today. Or do you want to sacrifice today for tomorrow?
Loan Modification: What we are seeing today is mortgage companies are lowering the original interest rate to something in the 3% range. For most borrowers, this rate reduction can be significant and can lower the monthly payment by a few hundred dollars. More signficantly, the mortgage companies are taking the mortgage arrears (the amount of money you are down or behind) and spreading it out over the life of the loan.
While this can be good, most recently, we are seeing loan modifications with extended repayment terms upwards of 40 years. This is rather frightening when you are already 6-8 years into your loan. It means that your mortgage loan will now be for 46 to 48 years long.
This means that you are mortgaging tomorrow to bring you relief today. This will cause you to spend tens of thousands more dollars in interest over the life of the loan. It brings you current today, but costs you a lot more money in the end. This can be good if the down income cycle you are experiencing now is likely to change soon and you will be able to ramp up your mortgage payments in the future. But if you only plan on making your normal monthly mortgage payments for the next 40 years you will end up paying 2-3 times what your house is actually worth.
Chapter 13 Bankruptcy over 60 months: The Chapter 13 bankruptcy is also known as a deb repayment plan. It takes that amount of money you are behind on the house and allows you to pay it back, interest free for the next 60 months. You go back to paying your normal monthly mortgage payment at the same time. Therefore, when the 60 months is up, the arrears are paid back in full and the house note is now current.
Don’t forget that in a Chapter 13 bankruptcy you can also pay back car loans and federal income taxes in full and get rid of most of your unsecured debt like credit cards, medical bills, and old loans or lines of credit.
Both loan modification or bankruptcy and have strengths and weaknesses. Our office does not sugar coat our advice. If we think the loan modification is best for you; we will tell you. Conversely, if we think the bankruptcy is best for you; we’ll tell you that too. We will walk you through both processes and give you our opinion. I have had a number of clients where I thought the loan modification was a great deal. I also have had a number of clients where I thought the loan modification was a horrible deal. We hope that is the kind of advice you expect from your attorney.
Call us today at (713) 974-1151 to schedule a no-obligation consultation or feel free to email us at firstname.lastname@example.org.
Bankruptcy Attorneys around the nation are taking part in this Bankruptcy Alphabet. See what other excellent attorneys are saying about the letter “E” in their blog posts.