How Bankruptcy Can Help

Whether you’re in foreclosure or just a few payments behind, we’ll help you get caught up on your mortgage and real estate taxes using Chapter 13 

      Many people think that filing bankruptcy will cause them to lose their home. This is absolutely not true. One of the principal reasons that people file Chapter 13 bankruptcy is to protect their home or other real estate when they are behind on mortgage payments. As soon as a Chapter 13 case is filed, the mortgage company is instantly stopped from pursuing any action against the homeowner. The homeowner does not have to make any immediate payments to get caught up. Instead, he or she begins making the regular mortgage payments each month, together with an affordable extra payment towards the mortgage arrears. It is almost like being approved for a home equity loan (the big difference is that you are eligible for chapter 13 regardless of your credit). So long as the homeowner makes the future mortgage payments and the required plan payment, the home is protected. This powerful remedy is known as the automatic stay, and it protects people against all forms of creditor activity, such as car repossessions, wage garnishments, and creditor harassment.

Most people who are behind on their mortgage also have other debt problems, so they probably need to file bankruptcy even if they are eligible for a mortgage loan modification

      In my experience, it is rare to see a situation in which the client is behind on mortgage payments but current on their other bills. Most people realize that they need to pay their mortgage before any other monthly bill. So, if someone isn’t paying their mortgage, it probably means something really bad has happened, such as a job loss, illness, or divorce. By the time the homeowner defaults on the mortgage, the homeowner has typically stopped paying all other bills, such as credit card debts and personal loans . Even if the homeowner is successful in negotiating a loan modification, he or she probably has many other bills that have piled up, and significant damage to the individual’s credit score has occurred.

      Understandably, most people who are behind on their mortgage tend to focus their attention on the loan modification process and put their other debts on the “back burner.” However, in our opinion, this is not the best approach. A majority of people are actually turned down when applying for a loan modification, and the banks often take months to review the application (if they ever review it at all). While the application is pending, the bank may not place the foreclosure action on hold, and the homeowner may end up incurring thousands of dollars in bank legal fees and costs. By filing the Chapter 13 bankruptcy case quickly, the homeowner is able to deal with the all of their debt problems at once and also obtain peace of mind in knowing that the home is protected.

We believe that a confirmed Chapter 13 plan gives the homeowner leverage in negotiating a mortgage loan modification

     While under the protection of the Chapter 13 plan, the homeowner should pursue a loan modification with the mortgage company if the homeowner has realistic chance of approval (we will tell you). A loan modification can help in ways the bankruptcy cannot, such as lowering the monthly payment, reducing the interest rate, and stretching out the term of the loan. Generally speaking, we encourage the homeowner to wait until after the Chapter 13 plan is confirmed before applying for the modification.

      Many people think that the filing of the bankruptcy ends their chance of applying for a loan modification. Actually, we believe that the reverse is true. With mortgage delinquencies in the millions, the banks are not happy to have so many bad loans on their books. It is not good for their image or their stock value. When a mortgage is delinquent, the bank is looking to eliminate the bad loan as soon as possible. In some cases, the banks feel it is in their interest to modify the loan. In most cases, we think the bank would rather foreclose as quickly as possible and cut its losses. When a Chapter 13 case is confirmed, the situation changes. Now the bank may be forced to carry the mortgage as a non-performing loan on its books for up to five years. We think this makes the bank much more receptive to a mortgage loan modification, and we believe that many Chapter 13 clients are approved for modifications for which they would not have been approved without the bankruptcy. In fact, in a significant percentage of chapter 13 cases, we actually receive letters from the banks inviting the homeowner to apply for a modification.