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Loan modifications versus bankruptcy protection

As we wrote about on this blog recently, there are programs offered by the state to assist some homeowners with meeting their financial obligations. However, readers may also be interested to know that a multi-state settlement with the many of the nation's largest lenders may also provide debt relief for South Carolina households. Yet before accepting a mortgage modification, whether under the multi-state settlement or otherwise, there may be some implications with regards to bankruptcy that one may wish to consider.

Under the settlement, the designated lenders have agreed to loan modifications for many of their customers. Moreover, Bank of America reached a separate settlement in which it will write down a mortgage loan to the home's fair market value for roughly 200,000 homeowners across the nation who are currently underwater on their mortgage. But as a news story explained recently, a loan modification can actually hurt the homeowner in some cases.

For example, if the person has two mortgages on one home and they go into bankruptcy, the second mortgage is typically wiped out when the homeowner is already underwater on the first mortgage. But that's not always the case if the person receives a loan modification on their first mortgage. When that happens, they may be on the hook for the second mortgage even in bankruptcy if the loan modification freed up equity in the home.

Moreover, IRS regulations require that a taxpayer report any loan forgiveness of $600 or more as "income." Thus, one could find themselves paying thousands of dollars in taxes because of a mortgage modification, although there may be tax exclusions that apply.

Instead of a loan modification, it may be preferable to file for a Chapter 13 bankruptcy. Under Chapter 13, the debtor is able to restructure their debt obligations under the protection of a court. They then create a debt repayment plan that puts them on the path toward financial independence within three to five years. South Carolina households suffering from debt should assess their options and their own unique situation to determine which option is best for them.

Source: ABC News, "Mortgage Modifications: When to Say Yes or No," Gerri Detweiler, March 11, 2012

1 Comment

I keep hearing alot about how the State and Banks are helping homeowners behind on their mortgages with Loan Modifications and other rescources. My question is what is happening with the help veterans were "Supposed" to receive under this new plan? I filed 3 times with Wells Fargo for a modification due to Medical retirement from the military and being placed on Social Security for 90% disability to try and save my home and because I was paying all my money to my mortgage on time and letting everything else slide, I was denied. Even when I finally fell behind they said my debt to income ration was "too high" and the only debt I had was THEM. I lost my home to foreclosure and not one entity, law, program helped this veteran. Is there any Justice in this?

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Reed Law Firm, P.A.
220 Stoneridge Drive,
Suite 301

Columbia, SC 29210

Phone: 803-726-4888
Fax: 803-726-4887
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Reed Law Firm, P.A.
1807 West Evans Street,
Suite B

Florence, SC 29501

Phone: 843-679-0077
Fax: 843-679-0667
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