The protections of personal bankruptcy may not do much to help if you still can’t quite afford your mortgage. Many people turn to bankruptcy at times when they worry about their ability to continue meeting financial obligations.
Falling behind on credit card payments or other unsecured debt can lead some people to consider bankruptcy. For other people, concerns about an inability to continue paying their mortgage may be the driving factor behind a potential bankruptcy filing. However, bankruptcy does not result in the forgiveness or discharge of your mortgage.
While the financial obligation to pay the loan may go away with discharge, the bank will have the right to reclaim your home unless you reaffirm or renegotiate your mortgage. For those worried about their ability to continue paying their mortgage, a loan modification during bankruptcy is often a smart decision.
The focus of Chapter 13 bankruptcy is renegotiating debts
For those who have substantial equity in their home or higher levels of income, Chapter 7 discharge may not be an option. Thankfully, these individuals usually qualify for the protections of Chapter 13 bankruptcy.
Chapter 13 allows people to restructure their debt, which often means paying less interest and having lower monthly payments due, with outstanding unsecured debts receiving discharge after several years of timely payments through the courts. Creditors and banks must negotiate with the court and the person filing to secure repayment during the bankruptcy process.
Your initial filing for Chapter 13 bankruptcy is often an excellent time to initiate negotiations with your mortgage lender, either directly or through the courts. Working with an attorney is often a smart decision, as having your own legal representation ensures that someone skilled can negotiate on your behalf. Ideally, you will be able to secure lower monthly payments or other changes to your mortgage that will make it easier for you to pay after discharge.
Loan modifications can address underwater properties and similar issues
There are many different financial situations where loan modifications can help. A common one is the underwater mortgage. These situations involve buyers who purchased property when the real estate market was at a high point. However, now the value of their home is lower, meaning their mortgage is for more money than their home is currently worth.
Lenders may be willing to extend the life of the mortgage in these situations or potentially negotiate an adjusted principal balance based on the current value of the home. Loan modifications are also useful if the person filing for bankruptcy missed multiple payments. Lenders can tack that additional principal on to the end of the loan by extending it several months.
It is also possible to adjust other terms related to the mortgage during a modification negotiation. If you want to keep your home but need lower payments or other changes to your mortgage, a loan modification may be your best option.