Many of my clients have become overwhelmed with high mortgage payments. Some of their payments increased due to an adjustable interest rate while a reduction in income made maintaining mortgage payments difficult for other clients. The good news is that some of my clients have been able to successfully reduce their mortgage payment through a loan modification. The bad news is that the process is often painstakenly slow and filled with pitfalls.
Getting approved for a loan modification isn’t always easy, but there are some things that can be done to increase the odds. Mortgage companies typically request a hardship letter and financial information in order to evaluate someone for a mortgage modification. It’s often helpful to have an experienced attorney or non-profit housing counselor review the application before it’s submitted. I often find that most of my clients do not draft a compelling hardship letter or properly complete the financial statements. These are things that can make or break a modification application.
It’s also important to make sure that all of the requested financial documents are promptly submitted. An incomplete application will delay the process even further and may result in a denial. Unfortunately, some mortgage companies seem to have a habit of losing applications or supporting documents so it’s important to always keep a copy of everything and to be prepared to quickly resubmit information, if necessary. It’s also crucial to keep track of when information was submitted and to whom it was sent. Keep fax confirmations and get delivery confirmation when mailing documents.
Regularly following up with the mortgage company after submitting the application and being persistant is important. One of my clients was quickly approved for a loan modification after sending a hardship letter directly to the CEO of the mortgage company. Sometimes, it’s possible to encourage a modification if there are problems with the loan such as Truth in Lending Act violations. A creditor might modify the loan in order to avoid litigation.
It’s important to remember that banks offer more than one type of loan modification. A denial for one type of loan modification doesn’t mean that it’s not possible to be approved for another type. Also, it’s important to remember that being in a bankruptcy does not mean that it’s impossible to get a loan modification. Many Chapter 7 and Chapter 13 bankruptcy clients are approved for loan modifications.
Are Loan Modifications Causing Foreclosures? The Huffington Post, August 20, 2010
Banks wouldn’t do things that were sleazy and illegal, would they? Chicago’s Real Law Blog, August 2, 2010 Read more ›
Will you do anything for money? The “broke, unemployed and bankrupt” can now apply for an upcoming reality tv show where they can compete for cash to pay their bills. The show is called Competition for Cash. It’s somewhat ironic that they’re looking for people who have filed bankruptcy because most filers get a discharge from most or all of their debt. Anyway, it will be interesting to see what type of things competitors will need to do in order win money.
When many of my clients file a Chapter 13 bankruptcy, their biggest concern is whether they will still have enough money to live on after making payments to the trustee. In the ideal world, there will never be a problem with the Chapter 13 plan payment amount. After all, the payment is based on how much money a debtor has available after paying living expenses. As long as the debtor can stick with a budget, there should be no problem.
Problems do arise for several reasons. Sometimes debtors do not accurately list their living expenses. For example, they forget about certain expenses such as pet food or underestimate the utilities. Without an accurate budget, debtors struggle to make their plan payments. When the budget fails, the Chapter 13 case is more likely to fail.
People who file a Chapter 13 bankruptcy are required to have reasonable living expenses. This may be a problem for people who are used to living beyond their means. It’s also a problem for some people who have suffered a loss of income because they are used to a higher standard of living. Also, the court doesn’t consider expenses for non-dependants to be reasonable so tuition payments for an adult child is not considered to be reasonable.
As a bankruptcy attorney, my goal is to help debtors reduce their living expenses and create a reasonable budget that they can maintain. In most cases, the monthly payments in a Chapter 13 plan are lower than the minimum monthly payments outside of the Chapter 13. The good thing about a Chapter 13 is that debtors who do struggle with the plan payments may be able to have their payment amount changed.
Some people prefer to negotiate settlements with their creditors either through a debt management company or on their own. Their goal is to avoid what they consider to be the absolute worst option:
bankruptcy. However, a bankruptcy provides some benefits that are not available in
When a debtor files bankruptcy, there is an automatic stay that becomes effective. Creditors must immediately stop all collection activity against the debtor. Creditors must stop sending collection letters and statements, garnishing wages, and contacting debtors on the phone. If a lawsuit is in process, the lawsuit must be closed with the court. As a result of the automatic stay, debtors get relief from creditors.
With debt management, interest rates are typically negotiated with creditors to reduce the monthly payments. However, there’s nothing that absolutely prevents creditors from contacting debtors. To make matters worse, there are some fraudulent debt management companies that take money, but don’t do anything to settle the debt.
Both bankruptcy and debt settlement are reported on credit reports. Bankruptcy can be reported for up to ten years, but that doesn’t mean that it will take ten years to improve a
credit score. Also, debt eliminated in a bankruptcy doesn’t count as income for tax purposes while settled debt may count as income.
As shown above, bankruptcy is not always the worst option in the world. There are benefits that are not available with other options.
There are some people who do not really have bankruptcy as an option despite low income. Some can only benefit from a payment plan provided by a Chapter 13, but they can’t afford the payments. Here’s an outline of people who may not benefit from a bankruptcy. Since everyone is different and there are exceptions to every rule, it’s always best to speak with an attorney when considering bankruptcy.
Prior Bankruptcy Filing:
People who received a Chapter 7 discharge within the last eight years must wait before filing another Chapter 7. The option to file a Chapter 13 bankruptcy may still be available if the person has income and can afford to make monthly payments.
Too Little Unsecured Debt:
People with a very small amount of unsecured debt typically should not file a
Chapter 7 bankruptcy. Examples of unsecured debt are credit cards, medical bills, deficiency from a repossessed vehicle, and utility bills. It’s usually not worth filing if there’s less than $5,000 in unsecured debt. In a way, it’s wasting the right to file bankruptcy since you have to wait so long before filing another one. Also, people with a very small amount of unsecured debt aren’t as harmed by the creditors as someone with higher debt.
Too Much Equity in Real Estate:
This is often a problem with low income elderly homeowners who have paid off their mortgages. Despite the low income, they risk losing their home in a bankruptcy because the home is worth too much. In Michigan, married couples may still be able to keep their homes even if there is too much equity. There’s a Michigan exemption that can be used by some couples.
Only Non-Dischargeable Unsecured Debt:
Some debt can’t be discharged or canceled in a bankruptcy.
child support, most
income taxes, and certain criminal fines are non-dischargeable. A Chapter 13 payment plan may benefit someone who
has non-dischargeable debt, a Chapter 7 will not.
Doing certain things before you file bankruptcy can result in problems with your case. For example, creditors can object to the discharge of their debt if you had no intention of repaying the debt when you obtained it. Therefore,
it’s important to stop using credit cards as soon as you decide to file bankruptcy. If you decide to file bankruptcy and continue to use your credit cards, one or more creditors might believe that you are committing
by filing bankruptcy. If the court agrees, you will have repay the debt.
Another problem may arise if you sell or transfer property before filing bankruptcy.
If you are concerned about keeping your home or other property, do not suddenly give it away to a friend or relative. Also, speak with a bankruptcy attorney before you even think about selling any property. Sales or other transfers can be considered to be fraudulent if done shortly before a bankrupcy filing. Bankruptcy trustees are especially suspicious of transfers to relatives for less than the full value. If you gave away something to a relative within the past year, the trustee can cancel the transfer, recover the property, and sell it to get money for your creditors.
In the same way, bankruptcy courts look at payments to creditors made before the bankruptcy filing. If you paid more than $600 to a creditor during the 90 days before filing bankruptcy, you must disclose the payment in your bankruptcy paperwork. You must also disclose loan payments made to relatives within one year prior to filing the bankruptcy. The trustee may believe that you are showing favoritism or a preference to the creditors or relatives by making the payments. They can recover the payments from the
so that all of your creditors can share in the money. (You’re allowed to make your regular mortgage and car payments so don’t worry about those.)
Prior to filing bankruptcy, you should also avoid withdrawing money from an IRA, 401K or other ERISA qualified
retirement plan. Funds in those plans are protected from your creditors and the bankruptcy court, but if you remove the money and put it in your bank account, it is no longer protected. Also, if you use some of the money to make large payments to some of your creditors, it may be a preference as described above.
Generally, most people who file
will not receive a discharge of their
income taxes. Therefore, they will still have to pay the taxes even after the bankruptcy is complete. However, it is possible for some people to discharge income taxes in bankruptcy. The first issue is whether the income tax return was due more than three years ago. For example, the 2003 tax return was due April 15, 2004 which was more than three years ago. Since it was due more than three years ago, the 2003 income taxes may be dischargeable.
The 2003 income taxes will not be dischargeable if they were not filed timely. For example, if they were filed in 2007 instead of when they were due in 2004, then they will not be discharged in the bankruptcy. A person who owes non-dischargeable income taxes can still use a Chapter 13 bankruptcy to set up an affordable payment plan to pay the delinquent taxes. Another option is to wait until enough time has passed for the taxes to become dischargeable before filing bankruptcy.
allows people who have filed bankruptcy or are thinking about filing bankruptcy to discuss their experiences. By sharing experiences, BKforum members provide support and information to each other. The forum contains a lot of useful information although some of it is less than accurate. Therefore, anyone contemplating bankruptcy should seek advice from a competent bankruptcy attorney.
The support provided by forum members can especially be useful to people who are concerned about the effect of a bankruptcy on their credit, employment, etc. I have a lot of clients who are worried about improving their credit or obtaining or maintaining a job after filing bankruptcy. It is possible to rebuild credit scores and it’s against the law for an employer to discriminate against someone for filing bankruptcy. However, even after I explain this to some clients, they are still worried. Communicating with people who have completed the bankruptcy process can ease the fear and make the decision to file bankruptcy bearable.
Some people want to repay their
debt, but they are unable to afford the regular monthly payments. Others are behind on mortgage payments due to a temporary reduction in income. Some people have debt that is not dischargeable in a
Chapter 7 bankruptcy
or their income is too high. In each of the above situations, a
Chapter 13 bankruptcy
may be a good option.
A Chapter 13
is a repayment plan that is based on a person’s income and expenses. If a person can only afford $200 per month based on living expenses, then that’s how much he or she will pay to the
bankruptcy trustee. Then, the
will divide the money up among the
creditors. Like other forms of bankruptcy, creditors are not allowed to
on property or take other steps to collect the debt. The repayment plan lasts for 3-5 years, then the remaining balance on dischargeable debt is cancelled.
A Chapter 13 can help someone become current on a mortgage payments. The Chapter 13 doesn’t decrease the mortgage payment, so it’s best for someone who missed mortgage payments due to a temporary financial setback. However, a Chapter 13 can be used to cancel a second
if the home is worth less than the amount owed on the first mortgage. The process is called stripping the lien and can potentially save a debtor a lot of money.
In an effort to save money, some people look into
without an attorney. They either prepare the bankruptcy documents themselves or hire a bankruptcy petition preparer. However, bankruptcy is a complicated area of law and filing without the advice of an attorney is very risky.
Non-attorney bankruptcy petition preparers are not allowed to give any
legal advice. Doing so is engaging in the
unauthorized practice of law. In Michigan, some preparers got into trouble with the bankruptcy court for providing legal advice to their clients. To make matters worse, they often incorrectly prepared bankruptcy paperwork resulting in many problems and revisions for their clients.
Failing to have correct information on a bankruptcy petition can result in the case being dismissed or a loss of assets. Filing bankruptcy involves more than just paperwork. An experienced attorney is better at predicting potential problems with a case. For example, are there any creditors who are likely to file a Complaint for
fraud? Additionally, not everyone who wants to file bankruptcy should do so and an attorney can provide legal advice about the different options.
Problems increase when a
Chapter 13 bankruptcy
is filed without an attorney. In the
area, there is a specific format for a Chapter 13 Plan. It’s important for creditors to be properly classified and for the payment amount to be properly calculated. People who file a Chapter 13 bankruptcy without an attorney end up with a dismissed case unless they hire an attorney at some point during the process.