For most pennsylvania homeowners who have fallen behind on their house payments, there are four options for stopping or preventing a mortgage foreclosure: (1) mortgage modification or refinancing, (2) mortgage foreclosure defense, (3) Chapter 13 bankruptcy, or (4) a sale of the property (often a “short sale”). If you are thinking about seeking a mortgage modification, filing for Chapter 13 or Chapter 7 bankruptcy, defending a foreclosure, or undertaking a short sale, it is important to understand how these actions relate to each other. First, let’s take a look at what a mortgage modification is and how it works.
What is a mortgage modification? A mortgage modification is an agreement between you and the mortgage lender to change the terms of your existing loan. A mortgage modification may involve a reduction to your interest rate, rolling any back payments into the loan principal (capitalization of the arrearage), or extending the term of your loan. The upside of a modification is that sometimes homeowners are able to obtain decent modification terms with lower interest and a reduced payment.
Mortgage modification is, in some cases, an alternative to bankruptcy. However, it can also be an option during a bankruptcy or as part of a mortgage foreclosure defense settlement.
Quick Note: A mortgage modification differs from refinancing in that when you refinance, you obtain a new loan to pay off your existing loan. Generally, refinancing is difficult to obtain if you are not current on your loan or have other credit issues. However, you can apply for a mortgage modification while you are behind on a mortgage.
Although seeking a modification is often worth a shot if you are struggling to make your house payments, it can be a frustrating process. The bank typically requires that you submit an extensive application. The bank then decides if it is in the bank’s interest to allow you to modify your mortgage. Unfortunately, too often homeowners seeking modifications or refinancing are treated abysmally. Banks encourage them to apply for a modification, only to lose their paperwork multiple times or refuse to return their calls.
In my Philadelphia debt resolution and bankruptcy practice, I have had numerous clients whose banks have lost their modification paperwork two or even three times. Others were given very positive feedback by the bank but, at the end of the process, were told that they never qualified for a modification in the first place. Banks often push viable loans into bankruptcy or mortgage foreclosure defense through their own obstinacy. That is not to say that it is not worth applying, but you have to be prepared for an endurance contest.
Beware: When considering any partial forbearance or “trial modification” offered by the bank, beware that banks sometimes offer homeowners a false modification. In other words, the bank may offer to accept a reduced payment for a period of time without a modification in place. Such arrangements may cause the homeowners to fall farther behind. Unless the bank ultimately agrees to a modification that takes care of this arrearage, the homeowners must pay the difference between the smaller payment and the original payment or face foreclosure. If you are unsure what you are signing, you should seek counsel.
Chapter 13 is an option when mortgage modification fails. Although Chapter 13 cannot change your mortgage payment, it can save your home by helping you catch up on back payments over time. In Chapter 13, any arrearage on your mortgage can be placed in the Chapter 13 plan and paid out over 36 to 60 months. As long as you make your regular mortgage payment and the plan payments, the bank may not foreclose. In this way, Chapter 13 has enabled many people to save their homes, even when faced with an uncooperative bank. In addition, if you have a second mortgage that is not covered by equity in your home, it may be stripped off in Chapter 13 and paid in the plan as unsecured debt, which may mean pennies on the dollar.
Can you modify a loan while in bankruptcy? Yes, and I have represented clients who received modification offers during active Chapter 7 and Chapter 13 cases. However, it is generally at the servicer or bank’s discretion whether or not to allow a modification during a pending bankruptcy case. Some modification programs, such as the Home Affordable Modification Program (HAMP), allow modifications during bankruptcy, as long as the lender agrees. However, some lenders state that you must sign a reaffirmation agreement in order to obtain financing, which is more often than not a bad idea.
Which comes first, the modification or the bankruptcy? If you file for bankruptcy during the modification process, and the modification has not yet been approved, it can cause the bank to stop processing the application. Therefore, timing can be important. If you plan to file and have a pending modification application, you should investigate your bank’s position on modifications during bankruptcy. Of course, you can wait to file for bankruptcy until after a modification is in place, if there is no reason to file sooner.
The bottom line on modification before, during, and after a bankruptcy is that policies vary from bank to bank (and many banks policies are inconsistent internally. Therefore, you should discuss your modification plans with your attorney before deciding which course to take.
In the next part of this series on stopping Pennsylvania foreclosure, we discuss mortgage foreclosure defense.