Are Loan Modifications an Alternative to Bankruptcy?

 Posted on November 28, 2021 in Foreclosure

Homeowners who have encountered financial difficulties may struggle to pay their ongoing expenses, including mortgage payments. Those who have defaulted on their mortgage after missing one or more payments may have been contacted by their bank, or they may have been notified that a foreclosure will occur if they do not make up the missed payments. In some cases, bankruptcy may be the best way to respond to a foreclosure notice. Bankruptcy may provide a homeowner with options to address outstanding debts and ensure that he or she will continue making mortgage payments. However, loan modifications may be another option that will allow a homeowner to make up missed payments and to continue making affordable payments in the future.

Mortgage Loan Modifications

The terms of a mortgage are not set in stone, and a bank or lender may agree to update these terms. In fact, it is often in a lender’s best interests to do so, since the foreclosure process is likely to result in financial losses, and lenders will often prefer to make arrangements that will allow them to continue receiving regular payments. 

Homeowners may have multiple options for modifying a mortgage loan in a way that will reduce their payments to an amount that they will be able to afford. These options include:

• Forbearance - Homeowners who have experienced temporary financial hardship may ask for their mortgage payments to be paused for a period of time. These payments will eventually need to be made up, and this may be done by adding them to the end of the loan or temporarily increasing mortgage payments until the amount has been paid off.

• Interest rate changes - A lender may agree to reduce the interest rate on a loan, which may reduce the amount of ongoing payments. A loan may also be converted from an adjustable interest rate to a fixed interest rate, ensuring that the amount of payments will remain the same in the future.

• Increased term - The length of a loan may be increased, which will result in lower, more affordable monthly mortgage payments.

• Capitalization of arrears - If a homeowner is unable to make up past-due payments, a lender may agree to add any missed payments, as well as fees and penalties, to the principal of the loan. This may be combined with other types of modifications that will reduce the amount of ongoing payments, ensuring that the homeowner will be able to afford these payments each month.

• Reduction of principal - In rare cases, a lender may agree to forgive some of the balance of a loan and reduce the total amount owed.

Contact Our McHenry County Loan Modification Lawyer

If you are behind on your mortgage payments and are facing the threat of foreclosure, The Thomas Law Office can help you determine your best options. Attorney Colleen Thomas will advise you on whether filing for bankruptcy may be a good solution for you or whether you may be able to negotiate loan modifications that will allow you to maintain ownership of your home. To get legal help with matters related to debt and bankruptcy, contact our Kane County foreclosure defense attorney at 847-426-7990.

Sources:

https://www.investopedia.com/terms/l/loan_modification.asp

https://www.forbes.com/advisor/mortgages/mortgage-modification/

https://www.nerdwallet.com/article/mortgages/all-you-need-to-know-about-mortgage-loan-modifications