Mortgage Modification: Should You Say No?

Bankruptcy Is Another Answer

Some of the nation's biggest lenders are offering loan modifications to their customers, and some of those deals include reducing the amount the borrower owes, a.k.a. "principal reductions."  Sounds like a good deal? Not so fast. As shocking as it may sound, There are times when a loan modification may make things worse, even when your house in underwater

When should you say no to a mortgage modification?

First Reason.    If you have a second mortgage and your first mortgage is entirely underwater, then your second mortgage is essentially unsecured.  This is a classic fact pattern in many Chapter 13 bankruptcies.  In these cases, these second mortgages can be "stripped," or wiped out, in a Chapter 13 bankruptcy. But if the lender reduces the balance owed on a first mortgage before you file bankruptcy and before your attorney files the Motion to Avoid the Wholly Unsecured Second Mortgage, then the second mortgage may no longer be stripped.

This is because case law in Chapter 13 bankruptcy is very clear that if there is even one cent of value in the home above the payoff of the first mortgage,  the loan cannot be valued as unsecured. That means it must be paid during the Chapter 13 case and it also survives the Chapter 13 as a lien on the property until it's paid off.   But if you file for bankruptcy first and wipe out the second mortgage, you then can apply for the loan modification.   By getting the loan modification approved in the manner, you will back onto solid ground again faster.

Second Reason.    Taxes!    When a lender does a principal reduction they are forgiving part of a loan balance; that "income" must be reported to the IRS on Form 1099-C.   You may be able to avoid paying taxes on that income, if you qualify for exclusion. But if you don't, you could find yourself with a hefty tax bill.   Debts discharged in bankruptcy, however, are not taxable.   Sound complicated? It is. But that's why it is important to get good advice, and meeting with a bankruptcy attorney would be the place to start. But timing is crucial, and missteps can be costly. So before you accept your mortgage lender's offer to modify your loan, tell the lender you have to consult your attorney first.

How do I get started?   

Call Steven P. Taylor, P.C. | Indiana Bankruptcy Lawyer

It is important to file bankruptcy before wage garnishment begins because wages that are attached before the bankruptcy is filed are gone - you can't get them back.   The first step in the process is finding an experienced bankruptcy attorney. We understand that for many clients, Saturdays are the only days they have off, so we make ourselves available. We welcome the opportunity to meet with you to talk to you about your situation at no charge. More than anything, we look forward to helping our clients get a fresh start so that they can start living their lives again.

Contact the law firm of Steven P. Taylor, P.C. today at (317) 271-1111 or (765) 868-0807 for a consultation about whether you should file for Chapter 7 or 13 bankruptcy to discuss bankruptcy and mortgage modifications in Indiana or email us your questions. 

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Steven P. Taylor, P.C. | Indianapolis Chapter 13 Bankruptcy Lawyer

Contact the law firm of Steven P. Taylor, P.C. today at (317) 271-1111 or (765) 868-0807 for a consultation about whether you should file for bankruptcy in Indiana or email us your questions.  Steven P. Taylor will assist you in determining whether a bankruptcy is the best path for you, and will guide you through the bankruptcy process.