Over and over again we hear the same comment from our clients that attempt loan modification.
- “Every time I speak with the mortgage company, I get a different person who tells me something different.”
- “I sent in my paperwork three times because they couldn’t find it.”
- “I sent in my paperwork only to be told that it was late, and that program was no longer open.”
Problems with Loan Modification and Workout Agreements • Why You Need a Bankruptcy Attorney
The fact is, unless they profit, mortgage companies aren’t very helpful. They won’t modify the principle, interest rate or place the overdue payments at the end of the loan. However, if a mortgage company is going to get less in foreclosure than if you keep it, some companies will work out a repayment plan.
⎆ Loan Modification Programs
Historically, very few homeowners found help in the Home Affordable Modification (HAMP) program. The program began after 2009 and expired in 2016. However, before its expiration, it seems there were less than 10% mortgage modifications and very few of the foreclosures stalled. This is an instance where the mortgage companies only gather information to help them collect or take payments from the homeowners and then foreclose anyway.
First, it’s important to understand that servicers process the applications for loan modifications. In fact, the servicers make money from both foreclosures and mortgage modifications. In addition, they earn fees from every phone call they make or letter they send out. Moreover, even if the application fails the first time, the servicer receives more pay to process it over again. So, how can a debtor without attorney representation expect this to be successful for them?
There is also a lot of mishandling and processing of applications. As an example, the foreclosure might be in process at the same time a modification is in process. This is known as “dual tracking.” Another dismal fact is that according to HAMP, less than 5% of homeowners actually get a mortgage modification after applying. Interestingly, you can check the statistics from the Congressional Oversight Panel Report which outlines problems with mortgage modifications.
In short, modification programs often leave the homeowner with fewer defenses because he delays filing Chapter 13 in lieu of the modification. At that point, the homeowner is farther behind which makes it more difficult to catch up by filing Chapter 13. The point here is to encourage you to skip the modification process and file Chapter 13 instead.
⎆ Debt Settlement Companies
Debt settlement companies have a very low rate of success. Debt settlement companies also take up to 40% fees from payments. Then, if their program fails, the debtor is farther in debt than when they start the program. Even if the debtor is successful, they are left with tax debt in place of what they might save in the plan. However, Chapter 13 cases repay as little as 1% and do not hurt your credit any more than debt settlement.
I don’t remember meeting anyone with a good debt settlement experience. On the other hand, people complete Chapter 7 cases nearly 100% of the time. They also complete Chapter 13 cases about 70% of the time. Plus, when Chapter 13 fails, the debtor normally converts to Chapter 7.
Moreover, of the 30% of Chapter 13 cases that “fail,” many are dismissals because the debtor gets current with their payments. Happily, the debtor is no longer in foreclosure because he sells the home, gets a modification, or cures the default. Then, he no longer needs Chapter 13. Conversely, debt settlement plans fail a dismal 90% of the time.
⎆ Short Sales Trigger More Taxes for You
Short sales trigger taxes for the seller and in some cases, the mortgage company might still attempt to collect. Moreover, as a result of a short sale, the following problems might exist:
- The debtor might owe taxes for the amount of debt forgiven by the mortgage company. After 12-31-2013, the mortgage company reports this as a loss and claims the loss as the debtor’s income on 1099.
- The homeowner can be still be sued for a deficiency unless they are formally released and they can sue up to 20 years later after the short sale.
- The homeowner is often asked to sign a note for the deficiency at a short sale.
- The homeowner works to sell the home for the mortgage company and doesn’t receive adequate benefits for his efforts.
- The debtor often must file bankruptcy anyway. However, if a debtor files bankruptcy, he should file prior to the sale to ensure there is no tax debt. Filing after a sale does not ensure there is no tax debt.
- If you short sale your home, the new homeowner might sue you for defects of the home.
I have rarely seen any good benefit in a homeowner taking the short sale route. Yes, you can do it. But why short sale, if you must still file bankruptcy anyway?
⎆ Filing Bankruptcy is Always the Best Decision
Once a Chapter 7 bankruptcy is filed the debtor normally only needs to complete a class and show up for his hearing that rarely lasts over 5 minutes. If the Debtor finds himself out of work or on disability while in Chapter 13 he is often able to obtain a hardship discharge in the 13 or convert to Chapter 7.
I think it’s easy to see why it’s always better to consider bankruptcy. So, why not bypass the loan modification programs, the debt settlement companies, and the short sales and go directly to bankruptcy instead?
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If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.