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What Option is Better: Loan Modification or Chapter 13?

We recently posted a blog describing options for when the homeowner having mortgage problems wants to sell the property, but what about the homeowner who wants to keep the property? Those homeowners have options too! The best options for a homeowner who wants to keep the house are to reinstate the loan, refinance the loan, modify the loan, or file Chapter 13 reorganization.

Typically, reinstatement and refinance of the loan are difficult options. Reinstatement is when the homeowner simply pays whatever is owed to catch up the loan, in one lump sum. Reinstatement includes full payment of all past-due monthly payments, late charges, and fees and costs, including attorney fees, inspection fees, escrow fees, etc. For a loan with monthly payments of $1,000, a six month payment arrears could result in a reinstatement of over $9,000 once all of the fees and charges are factored into the loan. Similarly, refinance is typically too difficult an option because in most cases the house has insufficient equity to borrow against, and the homeowner's credit has been damaged by the reporting of late payments by the mortgage company.

Loan modification could be a good solution if the homeowner has suffered a drop in income or an unexpected increase in expenses. In most cases, the bank will calculated 31% of the homeowner's income and compare that to the monthly mortgage payment. If the bank can, it will drop principal balance, reduce interest rates, re-amortize the loan, extend the loan term back out 30 or 40 years, or some other option that reduces the monthly payment down to 31% of the borrower's gross (before expenses) income. Note, if there is too big a gap between 31% if income and the borrower's pre-modification mortgage payment, or if 31% of the borrower's income is greater than the pre-modification mortgage payment, then a loan modification will usually be denied.

In some instances, Chapter 13 reorganization is a great option to help families keep their homes. Chapter 13 cases can eliminate (or "strip") completely underwater second mortgages, association liens, and judgment liens. Chapter 13 can also consolidate and reduce payments to credit cards, hospital or medical bills, the IRS, and student loans. This frees up more income to catch up the mortgage payments over the 60-month term of the bankruptcy plan. In addition, modification and chapter 13 can be combined so that in additional to all of the other benefits of the bankruptcy, the mortgage payment can be reduced by a modification of the loan as part of the Chapter 13 process.

The first question that we ask a potential client is "what is your goal, to keep or sell the property?" We will then analyze all of the available options and, together, pick the option that is best for the client and his or her family.

For more information on loan modifications, mortgage foreclosure, and Chapter 13 bankruptcy, please subscribe to the Yesner Law Podcast, on iTunes and Stitcher. If you prefer, please contact us to schedule a free initial consultation to discuss your options at 813-774-5737 or email me directly at shawn@yesnerlaw.com.

Shawn M. Yesner, Esq., is the founder of Yesner Law, P.L., a Tampa-based boutique real estate and consumer law firm that helps clients eliminate debt by providing options, so they can live the lifestyle of their dreams. We assist clients with asset protection, the sale and purchase of real property, Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, foreclosure defense, debt settlement, landlord/tenant issues, short sales, and loan modifications in Tampa, Westchase, Odessa, Oldsmar, Palm Harbor, Clearwater, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay area.

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