Do Loan Workouts Really Work?

20 Jan Do Loan Workouts Really Work?

So many times I see clients seeking a loan modification or loan workout for their mortgage(s). In most cases, these are very dangerous, and usually only put off the inevitable fact that the borrower can not maintain payments on the property. The workout/modification is just a temporary band aid in most cases.

The borrower often waives many important rights and causes of action/counterclaims that they may have under the mortgage. As part of the workout agreement, the lender almost always has the borrower execute a release of all claims they may have had against the lender.

This means that if there was a predatory lending cause of action under statutes such as the Truth-In-Lending Act, Real Estate Settlement Procedures Act, Home Ownership and Equity Protection Act, Fair Debt Collection Practices Act, Fair Credit Reporting Act, or other cause of action that the borrower may have been able to assert against the lender, they have now lost that right. And chances are, they were a victim of some sort of predatory lending, otherwise they wouldnt need the workout agreement!

The better practice is generally to file a Chapter 13 Bankruptcy. With a Chapter 13 Bankruptcy, the borrower will maintain all their predatory lending claims against the lender, and be in a far better position to cure the arrears on the mortgage. Instead of signing a release and having to come up with 1/2 the arrears in lump sum payment, the borrower does not need to sign any release or bring any money to the table.

Moreover, the arrears can usually be spread over the next 5 years. Likewise, past property taxes and HOA fees can also be spread out over the next 5 years. The list goes on and on!

So if you are considering a workout of your mortgage, always seek legal counsel first. And more importantly, make sure you also seek legal counsel on the ramifications of a Chapter 13 Bankruptcy instead. Chances are, in most cases, the Chapter 13 Bankruptcy will be quicker, cheaper, and more powerful than any loan modification.

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