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A Fresh Start on Your Home with Chapter 13

January 22nd, 2016 at 8:00 am

Adjusting your mortgage and other home-related debts under Chapter 13 can often give your home the very best fresh start.

 

Our last two blog posts have been about two options for when you need help making mortgage payments: a mortgage modification and a forbearance agreement.

In a nutshell, a mortgage modification reduces the monthly mortgage payments through a permanent restructuring of one or more of the terms of the mortgage. A reduction in the principal amount of the mortgage debt is seldom included. So while modification can help in the short-term–if you’re fortunate enough to meet the relatively tight qualifying standards—be careful about what it costs you long-term.

With a forbearance agreement the monthly mortgage payments don’t change. The lender simply gives you a certain number of months to catch up on the unpaid mortgage payments, while at the same time you must also make your regular monthly mortgage payment.

So, mortgage modification addresses a permanent cash flow problem while a forbearance agreement addresses a shorter term cash crunch.

A Chapter 13 “adjustment of debts” can deal with either, in the right circumstances.

Chapter 13 vs. Mortgage Modification and Forbearance Agreement

From the start Chapter 13 is different from these other two options in one significant way—it’s not voluntary on the part of the mortgage lender. Instead of you trying to meet the lender’s qualification standards, you and your attorney put together a plan based on what serves your own best interests. Although you certainly have to follow some rules, you are given a lot of latitude as you do so.

For example, you do have to pay all the first mortgage arrearage before the end of the case, but you’re usually given 3 to 5 years to do so. That’s in contrast to a forbearance agreement which usually only gives you a few months, a year at the most.

And the amount you pay each month can vary depending on what other obligations may be more urgent for you. For example, if you have to catch up on a vehicle loan arrearage, or if you are behind on child support, those can usually be paid ahead of the mortgage arrearage. Or the amount paid on the mortgage arrearage can be reduced while you are paying certain other high priority debts or expenses. This kind of consideration for other debts would simply not be permitted in a forbearance agreement.

As for mortgage modification, you’re usually not required to catch up on the arrearage since that’s wrapped into the rewritten loan. With that advantage, and with a reduced monthly payment, modification can be better than Chapter 13.

Chapter 13 with Mortgage Modification

A mortgage modification can be the most effective in combination with Chapter 13, in a two respects.

First, a Chapter 13 case can help you succeed with a mortgage modification. Without collection pressure from your other creditors, you stand a better chance of getting past the modification’s trial period and getting a permanent modification. And by significantly reducing how much you pay your creditors each month, you will more likely be able to stick to the terms of the mortgage modification in the long run.

Second, a mortgage modification can help you succeed with your Chapter 13 case, in a couple ways:

  • A mortgage modification results in you paying less on your first mortgage as a result of lower monthly payments and no arrearage to catch up on.  With less to pay towards the mortgage, that leaves more to pay other high-priority debts—such as recent income taxes and child support arrearage—that must be paid in full in a Chapter 13 plan in a maximum of 5 years. This means that a plan that would have been difficult to pay off in time becomes more feasible.
  • Similarly, with less money going towards the mortgage because of a modification, a plan that would have taken up to 5 years could be shortened to 3 years. Your income during the months before filing determines whether you plan must run a minimum of 3 years or 5 years. But even if you are only required to pay for 3 years, you are allowed to stretch the plan longer to reduce the monthly payment and better fit your budget. You’ll more likely be able to finish in 3 years if your monthly mortgage obligation is less, giving you more money to pay into your Chapter 13 plan. 

 

A Fresh Start with a Forbearance Agreement

January 20th, 2016 at 8:00 am

Whether you’re about to fall behind on your mortgage or have already done so, a forbearance agreement avoids foreclosure while you catch up.


Quick Definition

A forbearance agreement gives you short-term relief to deal with a temporary period of financial hardship. Your mortgage lender agrees, either in advance or after the fact, to accept a period of reduced or suspended monthly payments in return for your agreement to return to full monthly payments and catch up on the missed payments within a certain length of time. The lender agrees to not foreclose—to “forbear” from foreclosing—as long as you make the agreed regular and catch-up payments. You are given this grace period to bring the mortgage current and then return to making just the regular monthly payments.

Compared to Mortgage Modification

Forbearance agreements are usually much easier to qualify for and quicker to negotiate with the lender. After all you are not changing most of the terms of the mortgage—almost always the regular monthly payment, the interest rate, and the length of the overall mortgage don’t change. You’re just forgiven for a period of time of being in default on the payments, and are then required to catch up relatively quickly. A forbearance agreement does not make your mortgage more affordable long-term, but rather gets you back in good graces with the same mortgage you signed up for originally.

In contrast, a mortgage modification changes the terms of the mortgage to make it more affordable long-term, by reducing the monthly payment. But besides being relatively difficult to qualify for and process, mortgage modifications usually don’t reduce the principal amount you owe but rather make it somewhat easier to pay, with a reduced interest rate or a longer term (for example, 40 years instead of 30). See our last blog post for more about mortgage modifications.

The Relatively Rare Solution

So forbearance agreements are only appropriate for that relatively rare situations  in which you only miss a few months of mortgage payments and then get to a point in which you can not only afford the regular payments again but also pay a significant amount extra each month to catch up on the missed payments within a relatively short period of time.

The amount of time to catch up varies with each mortgage lender and the circumstances of each case. Periods of 6 to 10 months are common, seldom more than a year.

Take the example of a mortgage with a monthly payment of $1,500. If the homeowner missed 5 payments because of a job loss, he or she would be $7,500 behind on the mortgage. After the lender starts a foreclosure, the homeowner finds steady employment and negotiates a forbearance agreement to catch up on that $7,500 over the next 10 months. He or she would have to make the regular $1,500 monthly payment plus $750 extra every month for 10 months. During those 10 months the foreclosure would be put on hold. At the end of that time the homeowner would be current on the mortgage and the foreclosure would be canceled.

Forbearance Agreements and Bankruptcy

For most people, coming up with the extra monthly amount—the $750 in the above example—is impossible because of other debts. So forbearance agreements are often used together with Chapter 7 “straight bankruptcy.” Paying the catch-up payment can be much more feasible if you don’t have to pay most or all of your other debts at the same time.

Forbearance agreements do not usually work with Chapter 13 “adjustment of debts” payment plans. Instead Chapter 13 is often used instead of forbearance agreements if you simply don’t have the cash flow to make the catch-up payments that your lender would require of you. Chapter 13 can usually allow you to catch up over a much longer period of time—3 to 5 years instead of a year or less with a forbearance agreement. Stretching out the catch-up payments under a Chapter 13 plan lowers that monthly amount significantly. Chapter 13 may also allow you to stop payments on a second (or third) mortgage, give you longer to catch up on any back property taxes or homeowner association dues, and deal better with income tax liens or other obligations tied to the home. We’ll address the Chapter 13 option more thoroughly in our next blog post. 

 

A Fresh Start on Your Home If You’re Behind on Your Mortgage

January 15th, 2016 at 2:00 am

If you are behind on your home mortgage & want to keep your home, do a mortgage modification, a forbearance agreement, or a Chapter 13 plan.

 

The Three Options

Here’s a summary of 3 ways to get a fresh start on your mortgage:

  • A mortgage modification is a permanent restructuring of one or more of the terms of the mortgage to make it more affordable. This usually involves a reduced interest rate, the conversion of a variable interest rate to a fixed one, an extended payback period (often to 40 years), or a deferral of paying part of the principal. An actual write-off of any of the principal is very rare. A number of governmental and in-house lender programs may be available.  The process can be complicated and eligibility requirements are quite rigid. The reason is that they are intended for homeowners who neither make too much nor too little—who definitely need the help but also stand a decent chance of successfully meeting the terms of the modification.
  • With a forbearance agreement the terms of the mortgage don’t change but the lender agrees not to foreclose as long as you catch up the mortgage through a schedule of extra payments. Payment of the arrearage—the amount you are behind—is spread out over a certain number of months. The number of months you are given to catch up varies with each lender and with your circumstances, and tends to range from 3 to 12 months.  
  • A Chapter 13 payment plan also doesn’t change the terms of your first mortgage but gives you much more time to catch up—usually as much as 3 to 5 years. You also are given some flexibility about paying certain other important creditors ahead of or along with the mortgage arrearage. You may be able to “strip” a second (or third) mortgage from your home’s title so that you don’t have to pay any or most of that mortgage. That can get you closer to building equity in your home. You also have certain advantages in dealing with other liens on your home, such as those from property and income taxes, child or spousal support, a home repair contractor, or a homeowner’s association.  

When to Use Each Option

  • A mortgage modification is appropriate if you currently can’t afford your mortgage payment and don’t expect to be able to in the near future. Your income and other circumstances must show that you can’t afford the current mortgage but could afford the modified one, based on criteria that may or may not be realist in your circumstances.  
  • A forbearance agreement is appropriate if you’ve missed some of your mortgage payments, and can now afford to make both the regular monthly payment and a temporary catch up one to bring the debt current quite quickly. This is often used in conjunction with a Chapter 7 “straight bankruptcy” case, using the “discharge” (write-off) of other debts as the means to free up monthly cash flow for the catch-up payments.  
  • Chapter 13 is the appropriate option in two main circumstances. First, if you don’t qualify for a mortgage modification but also can’t catch up the mortgage arrearage fast enough to satisfy your lender, Chapter 13 can be the best fallback alternative since it gives you much more time to catch up. Second, Chapter 13 may be the best choice because of the other advantages it provides, either with other liens against the home (such as stripping a second mortgage) or with debts unrelated to the home, such as income taxes or marital obligations.

We’ll look more closely at these three ways of getting a fresh financial start on your home mortgage in our next three blog posts.

 

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