Chapter 13 is a very effective type of bankruptcy case that is often used by individuals in foreclosure in order to stop the foreclosure process. It helps debtors reorganize debt, including mortgage, car loan arrears, credit cards, taxes and student loans. Unlike Chapter 7, where debt may be completely eliminated, Chapter 13 involves setting up a five-year repayment plan that is binding on creditors. However, with the widespread use of mortgage modifications, Chapter 13 cases are not as common as they once were.
Chapter 13 Compared to Mortgage Modification
The first thing to think about when it comes to the relevancy of Chapter 13 is whether a mortgage modification may be possible . Chapter 13 is often used to reduce cure on a mortgage and allow debtors to escape foreclosure. However, if the debtor is able to achieve a mortgage modification they can lower their monthly payment and work their mortgage arrears into their loan, as opposed to their creating a separate plan payment due to a trustee, as per Chapter 13. Modifications help to restructure the mortgage and spread arrears over the remaining balance of the loan, by extending the term of the loan and lowering the interest due on future payments. If obtained, the modification can potentially exceed the goals of a Chapter 13 case.
Chapter 13 Bankruptcy Favorable to Debtors
Although a mortgage modification can help a debtor achieve a lower monthly payment and allows the reduction of arrears , Chapter 13 nay in some cases be the preferred option. The reason is that a mortgage modification is strictly voluntary and is not always obtainable. Some lenders may refuse to negotiate a modification or may find excuses and/or set up policies that make it extremely difficult for debtor to get a modification. A Chapter 13 plan, on the other hand, is binding on the lender and they are forced to accept regular post-petition mortgage payments as long as the debtor stays current with such payments in addition to those being made to the Chapter 13 trustee.
Issues with the Mortgage Modification Process
In addition to mortgage modifications being difficult to negotiate, the result of a modification negotiation can be a modification that insufficiently helps the homeowner. Due to the process being lengthy, with many delays, the size of the mortgage arrearage that build up can actually offset any benefit in rate reduction. The result for borrowers is a new loan that has a higher principal balance with only a slightly reduced monthly payment. In the end, this may not get the debtor the relief needed to help avoid foreclosure proceedings down the road.
Next Steps for Homeowners
While you are still deciding between seeking a mortgage modification and filing for Chapter 13 bankruptcy protection, it is important to get all of the information you can beforehand. Consult with a Long Island attorney concentrating in bankruptcy and modification about your options.
Written by Ronald D. Weiss, an attorney who specializes in bankruptcy solutions, foreclosure solutions, and modification and negotiation solutions for individuals and businesses.