Congress recently passed a law to address the problems in the subprime mortgage market. The proposed solution did not include changes to the Bankruptcy Code which would have permitted a Bankruptcy Judge to modify residential mortgages in a Chapter 13. The mortgage industry heavily lobbied Congress against these changes to the Bankruptcy Code, arguing that mortgage modifications in bankruptcy would seriously damage the mortgage industry. Whether the mortgage industry's fears are well founded is debatable. Certainly, members of Congress listened to mortgagees who claimed that the mortgage industry could solve many of the problems on their own by voluntarily modifying their mortgages for homeowners in financial distress.
The loan modifications, to date, have only benefitted a small percentage of the homeowners in financial trouble. Nonetheless, it is important to understand the circumstances under which a mortgagee would consider a loan modification and the ways in which the loan may be modified. Loan modifications are being promoted by mortgagees to homeowners who have fallen behind in their mortgage payments or are in bankruptcy. Mortgagees are not using uniform criteria as to when the loan modification proposals are offered; often, the modifications are offered at a time when the homeowner is in such financial trouble that the modification is too late to help. Even if mortgagees aren't pursuing homeowners with an offer to modify the mortgage, homeowners can take the initiative by persistently communicating with the mortgagee and insisting on a loan modification. I assist homeowners in Chapter 13 to save their home from foreclosure, as well as dealing with other financial problems. The additional option of seeking a loan modification for a homeowner can make Chapter 13 plan more successful by solving non-mortgage debts in the Chapter 13 plan, but solving the mortgage problems with a loan modification outside of the plan.
The usual loan modifications attempt to turn adjustable rate mortgages into fixed rate mortgages. Mortgagees considering a loan modification pay attention to a homeowner's ability to afford the modified loan, because the mortgagee doesn't want to make the effort to modify if the chances of homeowner success are not strong. The loan modifications also try to make the loan payment include both interest and principal payments (interest only loan payments only delay inevitable loan default), and also include escrow payments for taxes and insurance. The combination of interest, principal, and escrow maximize the likelihood of payment of a homeowner's major expenses associated with home ownership.
Homeowners having trouble staying current with their mortgage payments should aggressively pursue their mortgagees to seek a loan modification along with using bankruptcy as another means of addressing other debts which could impede a homeowner's ability to afford his or her home. There are usually more than one financial problem bothering a homeowner, in financial trouble, and a combination of solutions may produce the best results.