Lenders that accept
mortgage modifications often tout it as fantastic way to find relief
from debt. However, diving straight into mortgage modification isn’t
always the best option, as the scenario below illustrates:
Suppose a debtor has two
mortgages, totaling $300,000, on a house worth $187,500. On the
first, he owes the lender $200,000, and on the second, $100,000.
If the debtor agrees to a
mortgage modification outright, and the lender writes down the
balance on the first loan to $166,000, this puts the first loan on
solid ground, but the debtor himself remains $121,500 underwater.
Additionally, the second loan can no longer be stripped in a
bankruptcy case because the value of the house, if it was sold, would
cover a portion of the second loan.
On the other hand, if the
debtor files for bankruptcy, instead, this wipes out the second
$100,000 loan. The debtor still remains underwater, but only to the
tune of $34,000. While both scenarios will put the debtor at risk of
drowning financially, the second is still far more favorable.
A third option might see
the debtor filing for Chapter 13 bankruptcy. This wipes out the
second loan and puts the first on a repayment plan. The debtor can
then work with the lender to modify the loan, which then pulls him
completely clear of any risk of drowning.
Before entering a tricky
maze of mortgage modifications, consulting a bankruptcy lawyer first
is always best. Otherwise, you put getting the best deal at risk.
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