For homeowners who struggle to cope with the mortgage payments, getting a loan modification through bankruptcy is one way to help you financially. A lot of financial counsellors will tell you that filing for bankruptcy is a last resort. They are right. However when the odds seem to be stacked up against you, you may feel as if you have no choice but to do so. Don’t worry. There are some advantages of filing for bankruptcy to modify your loan.

Chapter 13 Bankruptcy

People who have trouble with their meager finances usually have two types of bankruptcy to choose form. One is Chapter 7 while the other is Chapter 13. The problem with a chapter 7 bankruptcy is that your assets will be liquidated so that your creditors will be paid. You don’t want that. A chapter 13 bankruptcy on the other hand, will allow you to restructure your debts so that the payments will be more manageable.

Why Choose Bankruptcy?

Filing for bankruptcy seems to be a strange way of paying your debts but it is very legal. So why file for chapter 13 bankruptcy?

1. New Provisions

The House has just approved a bill that will authorize bankruptcy judges to lower the mortgage payments so that it will be easier for homeowners having trouble with their finances. Your mortgage can be lowered either through reducing the amount of the principal or lowering the interest rate.

2. Reducing DTI

DTI or debt-to-income ratio is that part of your income that is used to pay for your mortgages. One of the provisions of the bill is that the government will try to lower your DTI to 31%. Suppose your DTI is 45%. What happens is that the lender will be asked to lower it to 38%. The government wil then split the 7% cost thus ensuring that your DTI is at 31%.

3. Providing Alternatives

One of the problems of using bankruptcy to pay for your mortgage is that in the long run, mortgage rates tend to go up. Thus before filing for bankruptcy, you can inform your lender that you have problem making the payments and plan to file for bankruptcy. Your lender then has 30 days to help you find a solution to the problem. If no agreement is reached by that time, you can still choose to file for bankruptcy and have your loan modified.

4. Questionable Loans

Let us assume that you managed to obtain the loan even without the proper paperwork. You can still file for bankruptcy. What the court will ask you though is that you give a good-faith statement that relates on how you plan to repay the loan that you want modified.

5. Lender Participation

Unlike other programs, if a lender agrees to modify their loan, then they have their federal insurance increased to %250,000 from $100,000. Thus even if providing you with alternatives is voluntary, the lender know that doing so is still advantageous to them.

A New Day Ahead

Once you get your loan modified, whether through bankruptcy or the lender’s alternative, it is important to make sure that you make the payments on time. Stick to a budget and prioritize your expenses. This way, everybody wins.