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Loan Modifications to Avoid Bankruptcy? 7 Tips to Help.

By Wendell Sherk, Missouri Bankrupcty Attorney

Since the mortgage market collapsed, loan modifications to avoid foreclosure have become industry and government policy.  Many people hope to modify their mortgages to avoid having to give up their homes and file bankruptcy.  The process is deceptively simple to get involved in – and easy to get burned by, even if you are working with a reputable modification agency.  Here are a few simple tips to keep in mind.

Keep copies of everything.

Your home is your most important investment.  Keep everything the mortgage lenders send you about it and about any modification you are working on.  A corollary is to keep notes of every conversation you have with them as well.

If they don’t put it in writing, assume they didn’t say it or they’re lying.

To enforce any change in your mortgage, there has to be a written document.  Businesses don’t remember anything that is not in writing.   And customer service phone reps get paid to get you off the phone quickly — so they may tell you something they can’t make happen to get rid of you.  Until you get any promise from them in writing, it didn’t really happen.

When they do put it in writing, assume they will lose it.

The most common problem with mortgage mods — lost paperwork. Almost everyone I’ve spoken to has had to send documents to their lender many times.  The servicers are so behind and so swamped they have trouble keeping their files in order — or simply throw documents out to avoid dealing with some of the work piling up.  This will happen to you, count on it.

Also consumers sometimes receive modification proposals and their lender doesn’t know about it later.  Sometimes the loans are transferred to a new servicer in mid-modification which will inevitably mean you have to start over.  But sometimes the modification offer is not properly filed in the servicer’s computer records.  Don’t be surprised to hear your mortgage company doesn’t know about the deal or asks you to send it back to them (in which case, keep a copy).

When they say to stop paying, put the money aside.  Plus the late fee.  Or maybe pay it anyway!

Many loan modification programs do not require you to be in default on your mortgage.  Some deals may require you to be current.  So think carefully when the lender says to stop paying the loan in order to get a modification.  And if you do stop paying in order to negotiate a deal — keep the money aside, and include late fees in your savings.

If the deal falls through — and there is no deal until everything is signed — you will be contractually obligated to pay all the missed payments and late fees.  You may be on the hook for a couple thousand dollars of legal fees if the delinquency has been sent to a foreclosure attorney too.  So don’t spend the mortgage money, no matter what.

While waiting to hear about your deal, they may start foreclosure.  Don’t ignore it. Even if they say, “Don’t worry.”

If you’re behind, they can foreclose.  The mods and the foreclosures come from different departments and they don’t talk to each other often.  Until the modification is official and finalized, they can still take your house.  (If you didn’t guess — Once they do foreclose, the modification is probably not going to happen.)

If you are set for foreclosure, even if the modification seems likely, get a lawyer.  Talk to a bankruptcy or foreclosure defense attorney.  You may incur some fees.  But calling a lawyer the day before your house is to be sold at foreclosure will make it very hard to find anyone to help.  Never bet your house that the mortgage company will help.

If they say the foreclosure is canceled, get it in writing.

Remember: If it is not in writing, it did not happen.  The loss mitigation department may tell you they’re going to cancel the foreclosure.  And they may even mean it.  But, well, there was an emergency long lunch and everyone got drunk…and no one called the foreclosure department (or, more importantly, the foreclosure lawyer).  And your house was sold, nothing we can do, sorry.  It’s not their house, they don’t care as much as you do.

If you have a modification, make sure the bills match your deal.

If your loan is officially modified, the bills the servicer sends you should reflect the new payment terms.  If they do not, their computer doesn’t know things changed.  With mortgage lenders, the computer is god.  It knows everything and it is perfect.  You might as well argue with an earthquake as try to convince a mortgage company employee that the computer is wrong.  If the bills are wrong, complain in writing, complain often, don’t stop until it is fixed and…keep copies of everything!

And here is some more information on working your modification from South Carolina attorney Dana Wilkinson.

None of these suggestions will guarantee your loan negotiation will succeed or that disaster won’t strike anyway.  They may make it easier to sue the lender for breaching its agreements with you.  And always be prepared for the possibility that you will need to file bankruptcy to save the house, like a Chapter 13 — or to minimize the damage if you must let it go.

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Full post as published by Bankruptcy Law Network on November 25, 2010 (boomark / email).