Comparison of the cost of paying mortgage arrears in Chapter 13 bankruptcy versus a loan modification

The economy is struggling to recover, unemployment is high, and as a result, there are many people who are behind on their mortgage payments and are at risk of having their home foreclosed on. To help people save their homes, mortgage companies and the federal government are touting the benefits of loan modifications, and homeowners are embracing the idea of ​​mortgage modification in record numbers. But before modifying a home loan, homeowners should weigh the true cost of refinancing their mortgage and instead consider curing mortgage arrears in a Chapter 13 bankruptcy case.

Loan modifications are often a lengthy process. Many of my clients who request a loan modification do not receive a response until a year after the process begins. After months of filing paperwork, jumping through hoops, they are often denied a loan modification and end up filing for bankruptcy to save their home.

Modifications may involve closing costs that may or may not be included in the modified loan, further increasing the amount financed. Also, once mortgage arrears are included in the new loan, they begin to incur interest, so curing $10,000 in mortgage arrears could end up costing the borrower $30,000 or more over the life of the loan.

In some cases, filing for Chapter 13 bankruptcy may be a better alternative to a loan modification. In the Northern District of Texas, mortgage arrears paid in a Chapter 13 bankruptcy are paid interest-free, so the cost of curing mortgage arrears is often lower than it would be in a modified loan. Most homeowners are eligible for Chapter 13 bankruptcy and the process does not require a lengthy application process.

In determining whether Chapter 13 bankruptcy or a modification is the best option, homeowners should consider whether the loan modification merely cures mortgage arrears or actually lowers the interest rate. If it lowers the interest rate, then a loan modification may be a better option than Chapter 13 bankruptcy because the cost of paying interest on the mortgage arrears that were remedied in the loan modification may be offset by the savings gained from the reduction of the interest rate. However, if the interest rate stays the same and the only benefit of refinancing the mortgage is to cure the mortgage arrears, then the homeowner should consider whether Chapter 13 bankruptcy might be a better option.