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Chapter 13 Bankruptcy: Maybe Better Than Mortgage Modification

Posted on: March 31st, 2014 by Charles Faquin No Comments

Since the financial crisis of 2008, the federal government has legislated mortgage modification and relief programs, namely HAMP and HARP. The Office of the Attorney General of Tennessee even formed its own homeowner assistance program ( with funds received as part of a settlement of a lawsuit against some of the biggest U.S. Banks.

Mortgage Problems

Though the modification programs have served to benefit some homeowners by lowering interest rates and monthly payments, the programs have caused a variety of problems for many homeowners that have submitted applications for modifications. Possibly the most frustrating problem created by the programs is when a mortgage servicer tells a homeowner that he/she will not be considered for a modification without first being behind on payments. This seems contrary to common sense for a homeowner that is current on payments that is seeking only to reduce or fix the interest rate. In reliance on advice from the mortgage servicer, the homeowner will skip payments and fall behind. Once the delinquency occurs, many times the servicer will refuse to take payments unless the homeowner is completely current. Meanwhile, the modification application is pending and the delinquency continues to grow for months or even years. If the modification application is rejected, then the homeowner is stuck with a huge past due amount that includes late charges and foreclosure fees and costs. In the rejection scenario, the homeowner will either have to bring the loan current with a large lump payment or face foreclosure proceedings.

Even if the modification application is approved, the mortgage company may offer a modification where the large arrearage amount will be added to the principal balance (often tens of thousands of dollars) and the loan term will be extended several years. In other words, the homeowner pays more over the life of the loan – even where there is a reduction in the interest rate.

A solution to the rejection or approval scenario lies in Chapter 13 Bankruptcy, which will stop a foreclosure dead in its tracks. In a Chapter 13 repayment plan, a homeowner can pay back the amount past due on the mortgage in partial payments over a period of 36 or 60 months, while also maintaining the monthly payments. When the plan is complete, the mortgage will be current and the loan will not have been extended past the original or existing mortgage note.