Home owners who are seeking a loan modification to help pay for their mortgage during times of financial difficulty are often faced with difficult situations. This is particularly true when considering bankruptcy as a measure to get back on track financially by discharging unsecured debts like credit cards. Understanding how bankruptcy can affect a loan modification can help ensure an educated decision is made about the processes.
The Simple Answer
When talking to a loan modification attorney about the options to reduce payments on a mortgage, it is important to determine whether an individual situation will have a negative impact on the process or not.
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In most cases, the bankruptcy will not negatively impact the modification. In fact, some families have found that filing for bankruptcy has actually helped show the financial need to creditors and smoothed out the modification process on their home.
While it is not always a negative situation, home owners who are planning to filing for a loan modification and considering or are going through a bankruptcy should always look up the creditor's policies before determining if it will have a positive or negative impact. Many creditors will have a loss mitigation or modification guideline detailed on their website or in their paperwork. If it is not possible to find the information with a particular lender, calling and finding out these details before filing for bankruptcy is an important part of determine the particular influence of bankruptcy on an individual level.
Potential Negative Impact
While bankruptcy does not necessarily mean that a loan modification attorney will not be able to help bring down the cost of the monthly mortgage payment, in some cases it will make the situation more difficult. This is primarily due to the fact that filing for bankruptcy might change the Net Present Value test results.
The Net Present Value, or NPV, test is one of the major factors involved in the modification approval process. When a bankruptcy goes through, many of the debts are cleared. This might result in a change to the present value of an individual or family, which might result in a change to the eligibility for a modification.
This is a potential negative impact on the processing of a change to the mortgage, but in many cases the change is too small to result in disapproval of the modification. In fact, it can actually help improve the chances of getting a modification in some situations because after the bankruptcy goes through, homeowners are able to prove that they are making enough income to pay the modified loan.
The question of whether a bankruptcy will harm or help a modification process depends on the particular situation. In some cases, the bankruptcy can result in a positive impact as it clears away some debts that might make it impossible to pay the modified mortgage. Other homeowners might see a disapproval because it does not clear away enough debts for the home owner to provide proof that they can pay the lower cost. Despite the differences in individual situations, bankruptcy can be helpful to some families who are striving to modify their mortgage.
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