Thursday, December 17, 2009

Are lenders forcing Americans into Bankruptcy?

Most people are heavily invested in their homes. Investment is of various kinds and types- financial (down payment, monthly payments, monthly upkeep, payment of taxes, etc.), emotional and time. Most people primarily have emotional ties. When they have financial problem, they want to work out a solution.

Loan modification, bankruptcy, debt consolidation, loan workout, etc. are various kinds of solution. Loan modification is one solution which has been most hyped. Government bailout has made it more dramatic. However, I have come across various situations where lenders have made people wait borrowers for loan modification for a long time and later denied it. Or, for instance, lenders are not willing to consider loan modification for 2nd homes.

Lenders can postpone foreclosure. Sometimes they don't. One of the methods to stop foreclosure is to file bankruptcy and get automatic stay protection. Other way to keep the house is to file Bankruptcy-Chapter 13. Chapter 13 is a reorganization plan where the law allows you, upon meeting the threshold requirements, to prepare a payment plan and keep the house. Under the plan, borrower/debtor makes the monthly payment as well as payment on delinquent amount to the secured lender. This plan needs to be approved by the U. S. trustee, no creditor should object and the Bankruptcy Judge has to approve it.

Lot of people, upon denial by the lender seek the protection of Bankruptcy laws. I wonder why lenders can not work something out in situation where the borrower does qualify for Bankruptcy and Chapter 13.

Internal Revenue Service and legal system find someone qualified, based on income and expenses, to file Chapter 13. However, the lender does not. I feel it is a big flaw in the system. Private lenders have too much power, too much discretion and too much of lack of compassion. It sucks!!

The problem is also complicated by the fact that lot of homes have lost their value. Therefore, even if the borrower makes sufficient income, lending guidelines do not allow refinance.

I wish there were universal guidelines (similar to lending guidelines to which licensed brokers had access to) with qualification criteria and people were not made to sweat about decision on loan modification, knew whether they will qualify or not right away and make adjustment to their finances privately and move on with new revised persona and private plan instead of having to file Bankruptcy and ruining their credit.

What are your thoughts!!