Modify mortgage or file Chapter 13 bankruptcy?
Now that the Obama Administration is encouraging lenders to offer mortgage loan modification plans, it’s a common question for distressed homeowners as to whether they’ll modify their mortgages or include it in Chapter 13 plan.
Here’s an example of a similar scenario:
Jack’s wife Sara has credit card debts and intends to file Chapter 13 bankruptcy. Each of her credit card debt amounts to $45000. They have a house in both their names and there are 2 mortgages on it. They’d like to keep the house but they have no savings. Jack is confused as to whether he’d request the lender for a loan modification on the first mortgage or should he just ask his wife to include the first loan in the Chapter 13 plan.
Now, to find out a solution in Jack’s scenario, one needs to consider the 3 factors as given below:
1. What’s the property value?
It is important to know whether Jack is upside down on the first mortgage, that is, whether or not the balance on the first mortgage exceeds the property value. If it is so, then Jack can include the first mortgage in Chapter 13 plan and have the second mortgage eliminated after completing the payment plan under Chapter 13.
2. Is your first mortgage a fixed or an adjustable rate loan?
If the first mortgage is an adjustable rate loan and the rate is likely to adjust while you’re in bankruptcy, chances are that payments could go up thereby making it difficult to repay the mortgage. So, in such a situation, it is better that you request the lender for a loan modification while including only the credit card debts under Chapter 13 plan.
3. How co-operative is the lender?
If the lender you’re dealing with has been co-operative ever since you’ve taken out the loan, he’ll be willing to work with you even when you file Chapter 13. In such a case you can try and work out a loan modification just in case you don’t want to include the mortgage in Chapter 13 bankruptcy.
When you’re in doubt as to whether you should include mortgage in Chapter 13 plan or go for a loan modification, find out what your monthly payment will come out to be if you include both mortgage and credit card debts in Chapter 13 bankruptcy. Then add up your monthly payment in loan modification to your credit card payments under Chapter 13. You can then compare the figures and then go for the option that requires you to pay the least.
July 9th, 2009 at 1:22 am
let’s say the upside down amount for the main mortgage is $100,000. In this case there are two options. The first option is to let the bank to foreclose. The second option is to include the payments for the $100,000 in the mortgage payments.
Why should not be able to do a compromise. Say Bank reduces the debt by $60,000 and the debtor pays the other $40,000 in cash from his/her IRA or borrowing from family members. I think this should work for both.
Regards!