O'Brien Law Firm, LLC - Bankruptcy

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Mortgage modifications during Chapter 13 bankruptcy

Filing for bankruptcy can be a powerful tool to aid people in gaining a firm financial standing. For this reason, more people are considering this option.

For those who own a home, there are a few ways that a chapter 13 bankruptcy may affect you. In particular, your mortgage lender may offer you a mortgage modification. There are a few important things to know about this option.

Mortgage modification

In short, a mortgage modification occurs when a lender, or mortgagee, works with a mortgagor to restructure a mortgage loan to fit within the mortgagor’s financial restraints. It is important to understand that a mortgage modification is not a refinance. The focus of a refinance is to allow mortgagors to finance the loan again, usually at a lower interest rate. On the other hand, a mortgage modification is a change to the current mortgage repayment, to make it easier for the mortgagor to meet the terms of the mortgage. During this process, the monthly premium may go down, but the lifetime of the loan will increase.

Possible benefits

Particularly in the case of bankruptcy, a modification can help the mortgagor in his or her financial adjustment after the bankruptcy process and allow the party to maintain the home. This tends to be the greatest draw of the option. Depending upon the terms of the modification, the interest rate of the loan may be low for a few years, and when it does increase, it will not rise above the rate that was set before the modification. The process is usually smooth and quick, seeing as it involves a loan that is already in place. 

The cost

Loan modifications come with some possible setbacks. The greatest possible disadvantage is the length of the loan. Many people do not realize that the restructuring of the loan comes with a new loan term. This increases the length of the loan, which in turn increases the amount the party will have to pay back. It is important to weigh the possible pros and cons as they apply to your situation.