Anyone interested in a mortgage modification is, by definition, someone who wants to save their home from foreclosure. Most times, they also want to avoid the "stigma" of bankruptcy. But this may be misguided.
First, most people having trouble paying their mortgage have other financial problems, such as large credit card debt. These debts can be easily "modified" through a Chapter 13 bankruptcy (often paying out a fraction of what is owed) or discharged entirely in Chapter 7. Removing this debt burden can often make the difference between losing and saving one's home.
Secondly, a effect of a bankruptcy on one's credit can be overcome over time, by careful spending and payment of debts. Compared to years of financial struggle on one's credit report, a bankruptcy's effect may not be as severe.
But most importantly, bankruptcy courts have gotten involved in the mortgage modification process, and in our experience, when courts get involved, lenders tend to pay more attention and things get done. I have seen this firsthand as a foreclosure mediator in New Jersey.
The track record of mortgage modifications to date has been dismal. Government reports on the process confirm this. Time after time, borrowers report to me that they send papers over and over. The process is glacial. The agents they are dealing with seem not to have a clue, or to care. New people who know nothing about what happened before step in and have no idea what is going on. Even when clients report they have gotten "approval" from one person, in several cases, that approval was later rescinded.
New Jersey has had a state court foreclosure mediation process. The process involves HUD qualified housing counselors, who do a great job. More importantly, lenders become accountable if they drop the ball or ignore the process. What percentage of foreclosures result in a lasting settlement is hard to say. Still the chances of success are better.
The New Jersey Bankruptcy Court has launched a Loss Mitigation Program for anyone in a bankruptcy in New Jersey, whether under Chapter 7 or 13 or another chapter. The program is only for mortgages on the debtor's principal residence. For 90 days, a borrower can request entry into the program to try to work out a mortgage modification, short sale or deed in lieu of foreclosure. The request has to be made at least 3 days before the First Meetin of creditors, which is usually about 20-30 days after the bankruptcy is filed. From there, the court can assist the process, order exchange of information, and can impose sanctions on parties who do not participate in good faith. While the process is ongoing, the borrower does have to pay at least 60% of the monthly principal and interest on the mortgage.
The Court cannot and will not impose a modification on any party, but as stated, court involvement never hurts and generally helps.
More information about the program can be found on the New Jersey Bankruptcy Court website: NJ Bankruptcy Court Loss Mitigation Program and Procedures
We can help you explore this process.
It is quite true that the mortgage modification process is glacial (and frustrating). There is talk in Massachusetts about this type of idea, but it has not happened yet. There is the obvious issue of how the bankruptcy court has any power to coerce the creditors, or even debtors, into coming to an agreement. Each program that another state implements will provide more examples for other states to follow. Great that you are hands on.
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