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Bankruptcy Versus Loan Modification

Should I do a loan modification or a bankruptcy?
Where it relates to your home, a loan modification changes your terms and brings the loan current where it relates to credit reporting. Also, a loan modification is a good last ditch option prior to foreclosure. On the other hand, offers protection with extended stay, which prevents foreclosure proceedings from happening.

Both a loan modification and a bankruptcy will stop foreclosure proceedings in its tracks, but a bankruptcy has more serious credit ramifications. It has a serious negative effect on your credit rating and can stay on your credit reports for up to 10 years. And, if you're filing for Chapter 7 bankruptcy, the protection of extended stay is only temporary-typically only 30 to 90 days. It's possible for a debtor to be discharged from his/her debts through Chapter 7 bankruptcy then end up in foreclosure and losing the home. A loan modification, on the other hand, has no negative impact on your credit rating because it's reported as a modification to the terms of your existing mortgage. So, actually, it stops further damage from happening to your FICO credit scores because a loan modification also brings your loan to a current status on your credit reports.

If you decide to do a loan modification, get a hold of your lender's loss mitigation department ASAP. Be persistent, because your lender is probably overwhelmed with similar requests from other troubled homeowners. If your continued efforts to work out a loan modification are unsuccessful, you should retain a real estate lawyer. Once you have attorney representation, the lender is required to respond and work with the lawyer within a 60-day dispute time-frame. Just be sure to get an attorney that specializes in loan modifications and has a thorough understanding of how to use the Truth in Lending Act and the Real Estate Settlement Procedures Act to get your lender to cooperate.

What is a loan modification?
A loan modification is an agreement between the homeowner and the lender that changes the terms of the existing mortgage loan in a way so the loan is easier for the borrower to manage. It can involve such things as a temporary forbearance of mortgage payments to allow the borrower to get in a better financial position to make the mortgage payments, folding any late payments and associated interest and fees into the loan and re-amortizing it into the principal balance, extending the terms of the loan, temporarily or permanently reducing the interest rates or something else that helps the borrower stay in the loan.

What is bankruptcy?
Bankruptcy is a federal law proceeding where a debtor voluntarily declares insolvency or is involuntarily declared insolvent by the creditors. During the proceedings, the debtor's non-exempt property is sold, and the proceeds from the sale are distributed among the creditors as payment for the outstanding debts. In the case of a Chapter 7 (total liquidation) bankruptcy, unsecured debts are discharged. In the case of a Chapter 11 (typically for businesses) or a Chapter 13, the debt is reorganized into a 3-5 year payment plan, so the debtor can keep property like a house.

During 2007, Realty Trac reported 1.77 million homeowners went into foreclosure, an increase of 78 percent from 2006. Moody's forecasts that 3 million more home loans will go into default by mid-2009, and two thirds of these will go into foreclosure. The Joint Economic Committee of the U.S. Congress estimates that over the next two years, the nation will experience a loss of $71 billion in home equity as a result of the foreclosure crisis while tax revenues will decrease by $1 billion.

FHASecure and the new HOPE for Homeowners Act provide holders of subprime adjuststable rate mortgages (ARMs) that reset within a specified period a chance to refinance their homes into a fixed-rate loan. However, FHASecure expires on December 31, 2008, and not everyone will qualify for these foreclosure bailouts. What other options are there to prevent foreclosure? Two frequently-used options available to troubled homeowners who can't do a conventional refinance and don't qualify for the foreclosure bailouts are loan modification and bankruptcy.

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