Wait for Modification or File Chapter 13?

30 Nov Wait for Modification or File Chapter 13?

Lately I have had a number of clients who have asked me whether they should continue to seek mortgage modification, or go ahead and file a Chapter 13 to stop a foreclosure. With the slow pace of lenders’ response to modification applications, and the pressure of possible foreclosure, it can be a difficult decision. Here are a few factors to consider.

1. You need to know what kind of modification you are applying for. It is not unusual for lenders who offer internal modification or workout programs to process those while proceeding with foreclosure at the same time. If that is the case, you may have a very limited time in which to deal with a foreclosure if you are turned down for a modification. Other programs, like the HAMP program, require that lenders stop foreclosures while they process modifications. It is important to know whether your lender is proceeding with foreclosure in parallel with a modification application, or suspending foreclosure. If the latter is the case, you will have more time to respond, but you still may have to respond quickly.

2. You need to know whether you are likely to qualify for modification under the application guidelines. For example, the HAMP program requires that you show that you have sufficient income to make the reduced payments in order to get approval. If you just lost your job, and you have no income, you aren’t going to qualify for that particular program. If you can predict with a fair amount of accuracy whether you will be accepted or rejected for modification, you can plan accordingly.

3. You need to know something about the foreclosure process where you live, and where your case is in that process. The type of process and the length of time foreclosure takes can vary enormously from state to state. There can also be differences in what a lender considers to be “in foreclosure” and what a lawyer would describe as “in foreclosure.” The best way to determine what the process is and where you are in it is to consult with a seasoned attorney who handles such matters in your jurisdiction. If the process is truncated where you live, or your property is about to be sold, your options may be much more limited that if the process allows you more time.

4. You may want to consider whether you have defenses to foreclosure. First of all, most modification agreements that I have seen contain some language that says that you are waiving any defenses to the mortgage. Know what you are giving up before you sign such a release. Further, you may also want to consider defending a foreclosure action as a third alternative to modification programs or Chapter 13. Many attorneys who handle such matters report that the most meaningful modifications that they see are those that are the result of settlement negotiations where defenses to foreclosure have been raised.

5. You need to know what it will take, both in time, paperwork and money, to file a Chapter 13 if all else fails. I get phone calls all the time from people who want to come in a discuss filing a Chapter 13, for the first time, on the eve of a foreclosure sale. It just can’t be done that quickly. There are documents to gather, paperwork to fill out, credit counseling to complete, and fees to pay, not to mention finding an experienced bankruptcy lawyer who has time to meet with you and review you situation. None of that can easily (if ever) be done on short notice. You need to prepare for a Chapter 13 bankruptcy filing, even if you hope that it won’t be necessary.

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Däna (pronounced "Donna") Wilkinson, has been a bankruptcy lawyer in South Carolina for 20 years. She is certified as a bankruptcy specialist by the South Carolina Supreme Court.
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