MODIFICATION, FORECLOSURE AND BANKRUPTCY MYTHS

In my Bankruptcy practice, I see people every day in the midst of a homeowner’s dilemma. Should one try to save the house, walk away from the home, file bankruptcy, do a modification, or something else?  When I first meet a new client, I often spend considerable time simply dispelling myths.

Here are some of my favorites:

1.    Modification is a federal program – they have to give me one.  Wrong.  The statistics are daunting, fewer than 30% of applications for modification are granted!   And under the best of circumstances, the path to a loan modification is an arduous process, often lasting many months.

2.    Modification will reduce the principal amount owed on the home.  Wrong.  Occasionally, the bank will reduce the principal owed - but it is very rare.  That said, there appears to be some  good news on the horizon though as more lenders appear willing to consider a principal reduction to avoid foreclosure.

3.    I will not be able to modify my loan if I file bankruptcy.  Wrong.  We often see loan modifications given to those in an active bankruptcy or port-Chapter 7.  In fact there are federal laws that typically make loan modifications inside a bankruptcy easier to obtain than outside a bankruptcy.   Moreover, eliminating credit card or other unsecured debt typically helps the loan modification process since it frees income to be used for house payments.

4.    Applying for a modification will stop a foreclosure.  Wrong.   The foreclosure process will usually continue while a modification application is being considered.  Sometimes the sale date will be postponed, but the process will go forward unless the modification is granted,.  Filing bankruptcy always stops (or at least postpones) a foreclosure.

5.    A modification will get eliminate missed payments.  Wrong.  Generally, missed payments will be added on to the loan balance and paid at the end of the term.  Depending on the circumstances, bankruptcy may get rid of or reduce some of the money owed on a house.

6.    Filing bankruptcy causes more damage to one’s credit than foreclosure or shot-sale.  Wrong.  It’s usually just the opposite – a foreclosure or short-sale is worse for your credit score than filing bankruptcy.

7.    If the house is foreclosed, I will have to pay the bank the money that I owed that they didn’t receive when they sold the house.  Wrong.  California has an anti-deficiency statutes, meaning that the bank that holds the first mortgage cannot come after the homeowner post foreclosure.  Many states do not have these statutes, but filing bankruptcy will get rid of anything owed the bank.

Give us a call to arrange a time to have a substantive conversation with an experience bankruptcy and real estate attorney.