loan modificationLoan Modification Deadend

For many property owners, loan modification has been a dead end.  Sometimes it is an outright denial.  In other instances, the lender simply refuses to make a decision, or transfers the loan to yet another servicer.

And if there is equity in your home, the lender have no incentive to work an arrangement with you.  At this point, there is a good chance the bank is simply moving along it process to foreclosure.

The Real Problem:  No Control

When a homeowner is waiting for the bank to approve a loan modification, the greatest frustration is the lack of control.  The owner is stuck in the bank bureaucracy, and just sort of hoping something works out.  Every time the owner contacts the bank the owner may find out the mortgage has been transferred to an entirely new bank, and the owner is starting from square one . . . again.  An owner may even be instructed to stop making payments, because this can somehow apparently help with modification (which is crazy, right?).  And at the end of months or years of effort by the owner, the bank may well foreclose on the property anyway.

Time To Switch Strategies?

Certain types of state court litigation arose in part because all the homeowner frustration described above.  Unfortunately, much of this litigation has failed to produce meaningful results.  The problem is this:  there is really nothing that requires a bank to grant an owner a loan modification.  And judges are weary of  hearing some attorney argue that a loan is somehow now void for a minor technical detail.  At the heart of it, virtually no judge is going to award a borrower ownership of a property and at the same time simply cancel out the associated mortgage debt.  This doesn’t happen.

Bankruptcy: An Option For Loan Modification

Bankruptcy is almost never going to allow an owner to keep a property and simple cancel out the mortgage debt. Bankruptcy is not designed for this purpose, and judges would ultimately view it as inequitable. In fact, almost no legal process can accomplish that result. However, bankruptcy can adjust the amount of debt owed, and alter the timing of certain payments. This includes debt secured by real property (such as a mortgage/deed of trust). And bankruptcy has several key advantages over the bank’s loan modification process. In bankruptcy, a bank needs to wake up and become involved in order to protect its interest. At its core, Bankruptcy is a means for a property owner to reassert some control over the process, and force banks to take some sort of action. And if a bank prefers to continue its inaction, then the bank may later be forced to simply accept the loan terms established through the bankruptcy process.

Here’s one example (how bankruptcy can produce a different result):

Facts: A property owner had fallen behind on approximately 12 months of mortgage payments, but is now able to make the ongoing payments to the bank. The bank, however, insists that the owner cure the 12 months of arrears immediately, otherwise it will commence foreclosure. The owner has some funds, but not enough to cure all 12 payments immediately.

Outside of Bankruptcy: The owner is attempting a loan modification, but has been denied several times. The bank has the right to foreclose, and refuses to agree to a loan modification. Other than pleading with bank personnel, the owner has few options.

Inside a Chapter 13 Bankruptcy. In a chapter 13 case (referred to as a individual reorganization), the bank is prevented from foreclosing on the property, while the owner (now referred to as the “debtor”) proposes a chapter 13 plan. In that plan, the debtor can continue to make the regular monthly mortgage payments, while also curing the mortgage over the course of several years (often, this will be five years).  At the same time, the debtor can make manageable payments on other outstanding debts (such as credit cards or medical debt) over that same five-year plan period.

Here’s another example:

Facts: An husband and wife own a small commercial property, in which they operate their small business. The business suffered during the recession, but is doing better.  Unfortunately, the mortgage on that property bears an interest rate of 8%, and the owners are 13 months behind in payments. The owners can afford ongoing payments, but can’t cure the arrears as fast as the bank demands. The bank is aggressively pursuing foreclosure.  To make matters worse, the value of the property exceeds the balance on the loan (i.e. there is equity in the property).  Any foreclosure will hit the owners twice – first they will lose their income because their business will be forced to vacate the premises, and second, they will lose the equity in the real property.  Foreclosure will be a financial disaster, and the foreclosure sale date is rapidly approaching.

Outside of Bankruptcy:  The owner has almost no options.  Unless the owners can come up with all the money needed to cure the arrears before the sale, they are likely to lose the asset and their business.  Because there is equity in the property, the bank has a financial incentive to foreclose (since the bank may be able to take ownership in the foreclosure sale).

Inside Chapter 13 Bankruptcy:  As soon at the bankruptcy case is filed, the bank is prevented from foreclosing on the property.  At the same time, the debtors may present a plan which allows for continued mortgage payments, but also allows for 13 months of arrears to be cured over time (usually, five years).  The chapter 13 bankruptcy will also allow the debtors to continue to operate their business, and prevent the loss of equity in the property.

InsideChapter 11 Bankruptcy (another alternative).   A chapter 11 is considered a business reorganization.  This chapter is more technically challenging than a chapter 13, and requires a greater level of attorney skill (few attorneys have experience in 11s).  At the same time, this chapter can actually provide additional options, otherwise unavailable in chapter 13.   The owners could actually adjust the terms of the mortgage debt, including interest rate, the remaining term on the loan, as well as how arrears are paid.  If altering the actual terms of the loan is particularly important, chapter 11 may be ideal.  As with all issues discussed herein, it is advisable to consult with an experienced attorney to determine the best course of action.

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