Loan modifications are typically a lengthy procedure. Many of my clients who request a loan modification do not receive a response until one year after the process has begun. After months of submitting documents and going through hoops, they are frequently denied loan modification and are forced to file bankruptcy to save their home.
Modifications may incur closure costs, which may or may not be financed as part of the modified loan, thereby increasing the total amount financed. In addition, once mortgage arrears are included in a new loan, they begin accruing interest, so eliminating $10,000 in mortgage arrears could cost the debtor $30,000 or more over the term of the loan.
In certain situations, Chapter 13 bankruptcy may be preferable to loan modification. In the Northern District of Texas, mortgage arrears repaid in a Chapter 13 bankruptcy are paid without interest, so the cost of resolving mortgage arrears is frequently less than it would be with a modified loan. The majority of householders are eligible for Chapter 13 bankruptcy, and the application process is quick.
To determine whether Chapter 13 bankruptcy or a modification is preferable, homeowners should consider whether the loan modification merely eliminates mortgage arrears or truly reduces the interest rate. If it reduces the interest rate, a loan modification may be preferable to Chapter 13 bankruptcy because the cost of paying interest on the mortgage arrears eliminated by the loan modification may be mitigated by the savings obtained from the interest rate reduction. However, if the interest rate remains unchanged and the only benefit of refinancing the mortgage is the elimination of mortgage arrears, then the homeowner should consider whether filing for Chapter 13 bankruptcy would be a preferable option.""
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