Thursday, November 25, 2010

Loan Modification or Bankruptcy

Loan Modification is the process of changing the loan program which a borrower has. It is a modification of loan contract between the lender and the borrower. It is not a right so to speak. It is really lender’s discretion.

Lenders provide no written acknowledgment of loan modification. Borrowers submit written application and documents to support loan modification. However, follow up and discussions are always verbal. I would argue that it creates an oral contract. It creates a detrimental reliance, at the very least. The situation does create a legal problem. Short of legal dispute, and obtaining records through legal methods in lawsuit, there is no evidence of loan modification.

Lenders also schedule Trustee Sale or Foreclosure date routinely and regularly through loan modification process and continually postpone the sale date in it’s’ discretion while loan modification is pending. Lender does not have to provide written notice of foreclosure date after initial (or very first) notice under the law.

Borrower, in the process of loan modification, should not take it granted that foreclosure shall be postponed again because it has been postponed once before, or many times. Keep in touch with the lender and make sure to be aware of Trustee Sale date and request postponement or you might lose your house. I know of many situations where the lender conducted the foreclosure while borrowers awaited a decision on loan modification.

If you are in such a situation where lender won’t postpone the Trustee Sale date and your income has gone down making it doubtful to begin with and your liabilities are increasing, filing bankruptcy might be a good option. Filing bankruptcy especially Chapter 13 can serve following important functions:

1. It can stay (and postpone) the Trustee Sale. Bankruptcy provides automatic stay for 120 days.

2. It can assist you wipe out consumer debts which decreases your total liability enabling you to be perhaps more eligible for loan modification. Not all lenders offer loan modification to debtors in bankruptcy or post bankruptcy though.

3. Filing Chapter 13 bankruptcy, if qualified, can help you wipe out second mortgage or lower the value of first, if the house value has gone down. Law offers such benefit through a provision called Lien Stripping. Chapter 506 of the Bankruptcy Code provides such benefit. A lien is as good as the value of the collateral. If value has gone down, then the lien is stripped to match the value of the collateral.

4. Bankruptcy allows you to pay the delinquent amount over a period of 3-5 years, depending upon the Chapter 13 Plan.

5. Buy piece of mind and start over.

So, filing Bankruptcy especially Chapter 13 might not be a bad idea specifically where you might not qualify for loan modification at all and face foreclosure. One has to qualify to be able to file for Bankruptcy. So, contact a local bankruptcy lawyer today.