The Intersection of Bankruptcy and Loan Modifications Aka Loss Mitigation
Is your house in foreclosure? Have you have been working with the mortgage company for months to try and get a loan alteration which could solve the issue? Does the mortgage company seem to be dragging their feet, asking you for the same documents over and over and however you do not seem any closer to truly accomplishing anything? Now seemingly out of the blue there has been a notice of Trustee/Sheriff’s sale. You panic. There is an option that will save your house and permit you to continue to work on obtaining a loan alteration. That option is a chapter 13 bankruptcy. The chapter 13 will stop the sale now and give you a repayment plan which if you complete will put you right where you should be with your mortgage (your mortgage will become current). The filing of the chapter 13 does not average that loan modifications are not possible, but if you had already started, you will likely have to begin again. This time, however, there will be no threat of losing your home. If however, you are surrendering the home, there are nevertheless option you should pursue while you are in the bankruptcy.
After you file the case and the sale is stopped, you can then restart the loan alteration proceedings by requesting a loss mitigation package from the lender or servicer. When you do this they usually send out a “waterfall” package. This is an application that would check for eligibility for a HAMP loan alteration, an in-house alteration, eligibility for a shortsale, and eligibility for a deed-in-lieu of foreclosure, and possibly eligibility for a short payoff. This post will analyze all of those options and additional loan mod options other than HAMP.
After you receive the loss mitigation package, it is important to make sure that you have all of the requested paperwork together prior to sending it to the mortgage company or servicer. They will generally ask you for 2-3 months of bank statements, a Dodd-Frank Certification signed and dated, copies of your most recent pay stubs for 2 pay periods to 3 months or longer, a form 4506-T form signed and dated with your phone number and filled out correctly, copies of your last two years of taxes, and a hardship letter. A number of those are self-explanatory, some of them are probably unfamiliar. The Dodd-Frank Certification just needs signed and dated, no big deal there. The 4506-T form has to be filled out perfectly or your loss mitigation application course of action will be delayed by months. You really need to check with your attorney to ensure that you are filing it out correctly. Generally, you need to fill out the top completely, select the kind of transcripts that you want them to send the mortgage company, you need to list the years that you want them to send, it is generally 3 years and they generally want the date format to be 12/31/2012, 12/31/2013, 12/31/2014 for example. You then need to sign it, date it, and put your phone number next to the identifying characteristics line. As for the hardship letter, it should indicate why you began to fall behind on your mortgage, and when or why that hardship is or has ended so that you will be able to make some payment in the future.
Part of the application course of action also requires you to fill out your household income and expenses. A shared mistake that people make is to under report their income/ over report their expenses. Keep in mind that part of the time of action, if you are seeking to modify the loan, is that the alteration review has to go by underwriting. That method that they will be checking to see if you will be able to provide the new payment that they can offer. If you cannot show that you will be able to make the payment, you will not be offered a loan alteration.
The different types of loan modifications that the bank can or will offer will depend on if they have ever offered you a loan alteration in the past. HAMP stands for Home Affordable alteration Program. It is a program that was set up in the aftermath of the subprime mortgage crisis. Generally you receive only one HAMP loan alteration offer per loan. This is not a hard and fast rule, however, and I have seen HAMP modifications offered more than once per loan. HAMP modifications may reduce the principal balance, they may reduce the interest rate, they may reamortize the loan over a longer period of time (stretch your loan out), or they may do a number of these things to help you to get a lower loan payment. Offers that include a principal reduction will usually have certain benchmarks that you have to meet in order to ensure that the principal really is forgiven. If you fail to meet these benchmarks, the forgiven principal will return. Generally, you will need to ensure that the loan is in good standing on the first, second, and third anniversaries of the effective date of the trial period. The amount that the principal is reduced by will generally not be treated as taxable income. Speak to your tax attorney or accountant for more information on this. Another kind of loan alteration that your mortgage lender may provide is an in-house alteration. For an in-house loan mod, the lenders are not bound to the requirements of HAMP. They can also offer these already if they determine that you are not eligible for HAMP. The results may not be as good but they should nevertheless be better than what you currently have. Unfortunately, you may find that the alteration offer is not to your liking. Perhaps it doesn’t reduce the interest rate by much, or maybe it adds 10 years onto your loan and you don’t find that palatable. So long as you continue by your chapter 13 bankruptcy you will finish it with your original loan intact at the original terms and on time per the original payment schedule. (There are some small caveats to this you should ask your attorney about.)
Another option if the alteration will not work is to ask for a short payoff. Essentially, you are asking the lender/servicer to settle the remaining balance for something less than is owed. I have seen short payoffs between 10% and 33% so some incredible options are out there if your lender determines that you qualify. You would need to speak to your tax attorney/accountant to see if you will have to pay income tax on the forgiven debt.
Short-Sale, Deed-in-lieu – What if you decide that you don’t really want the character any longer? In that case, you have a associate of options. Simply surrendering the character in a bankruptcy is not enough. If you simply surrender the character in the bankruptcy and then the mortgage creditor sits on their rights and doesn’t move to complete the foreclosure course of action, you will be stuck with liability on the character if anyone were to get injured or for housing code violations. To avoid this, you can attempt to do a short sale. A short sale is potentially obtainable where you are underwater on the home. If there is only one lien on the character you are much more likely to accomplish a short sale. The more liens there are, the more parties have to be satisfied with the sale offer. The same goes for a deed-in-lieu. A deed-in-lieu, short for deed-in-lieu of foreclosure is where you sign the character over to the mortgage creditor in exchange for them not foreclosing on the character. This can potentially save the edges lots of money and has the assistance to you of getting rid 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 field to help you out.
Best of Luck,