Chapter 13 and mortgage modification are two processes that can work well together. Courts oversee bankruptcies, while you generally negotiate a modification with your lender directly. They both help you restructure debt in different ways, and many people need both to get back on sound financial footing.
- A mortgage modification changes the term of your existing loan
- Bankruptcy restructures your existing debt. It gives you a plan to catch up on your payments in arrears, but it doesn’t change the terms of your loan.
- You can modify your loan while you are in bankruptcy.
If you are in danger of losing your home, you should speak to a bankruptcy lawyer about your situation. Work with them on a strategy to get your bills under control so that you won’t lose your house.
Will Mortgage Modification Stop Foreclosure?
A loan modification will stop foreclosure, but not immediately. You must go through a process with your bank to modify the loan, and that takes time.
- Only homeowners who are delinquent or in imminent danger of default are eligible.
- They change the term of your loan so that you can make the monthly payments.
- You must explain why you need this with either a proof of hardship or a hardship letter.
- If they deny you, you can appeal the decision.
Each lender has a different process, and it can take months. If you continue to fall behind during this time, they may begin the foreclosure process. Therefore, it’s important to go to your lender immediately and try to work out a solution early. If you are unsure how to apply or your bank denied your application, try working with a HUD-approved housing counselor to make your best presentation and to learn about all your options.1
Will Chapter 13 stop a foreclosure?
Chapter 13 will stay a foreclosure. If you already face this action, you should file and then modify your mortgage.
- An automatic stay that forbids your lender from selling your house goes into effect immediately.
- This stays in effect throughout the bankruptcy period.
- If you don’t keep up with your monthly payments the court will lift the stay, and your lender can continue foreclosure.
Bankruptcy interrupts the foreclosure process. It gives you protection from your creditors. The court will not discharge your mortgage, though. You must make your payments, or the court will allow the bank to continue and sell your home.2
Mortgage Modification Mediation Program
A Mortgage Modification Mediation (MMM) program is part of the bankruptcy process in some states. In most cases, bankruptcy is a process governed and mediated by the courts, while mortgage modification is a private process between the debtor and the lender. MMM brings the modification process under the umbrella of the courts.
- Either the debtor or lender may petition the court for this arbitration.
- Each party pays mediation fees, and they split other costs evenly.
- The court must approve any successful agreement.
This allows a third party to mediate a mutually beneficial agreement that allows the bank to continue to service the loan and the homeowner to stay in their house. Not all courts provide this, but it is getting more popular.3
Can Chapter 13 lower my mortgage payment?
Chapter 13 will not lower your mortgage payment. In this type of bankruptcy, the court:
- Puts you on a payment plan to catch up on your payment in arrears.
- Won’t change the terms of your mortgage.
- Leaves you current on your payments at the end of the period.
The court restructures your debt but not your loan. Coming out you get to start fresh. However, if you can’t make the original payments then you still need to modify or refinance your loan. You may even have to sell your house.4
Loan Modification While in Chapter 13
You can get a mortgage modification while in Chapter 13, and often it is a good strategy. Both have the goal of restructuring your debt so that you can make payments and not fall behind again, but they deal with the problem in different ways.
- Chapter 13 restructures your arrears, but your mortgage terms stay the same.
- Mortgage modification Changes the terms so that you can make monthly payments.
When you get behind on your loan payments your lender piles on penalties and fees. These pile up beyond the monthly payments that you must pay. If you can’t afford the regular bills, then accumulated penalties become impossible to ever get caught up. This is when you should file Chapter 13. The court restructures your debts into affordable payments. At the end of the bankruptcy period, you are current on your mortgage.
A mortgage modification changes the terms of your loan. By doing a modification while you are in bankruptcy you have the option of keeping your house and getting a monthly payment you can afford.
Final Thought on Chapter 13 and Mortgage Modification
If you lost your job, had a major medical emergency, or had another financial crisis where you lot income, you may not be able to pay your mortgage. Modification and bankruptcy are options that may help.
You want to modify your mortgage when you have a long-term loss of income, and you know that you need a lower monthly payment for an extended period. On the other hand, if you have a short-term problem and missed a few payments and expect to be able to make your payments in the future then bankruptcy may be the answer.
Most of the time, both are true. Many people need relief from their creditors, and they don’t see how they can make high payments in the future. Bankruptcy will give you that reprieve from creditors, and modification will lower your monthly payment going forward.
Don’t try to navigate this alone, though. Consult with a bankruptcy lawyer to learn all your options. Also, they can give you objective advice on whether it’s realistic to keep your home or sell. Often that is a difficult, emotional decision.