During Covid-19, the Federal Government mandated that Federally backed mortgage lenders offer their customers forbearance plans.
You had a right to a COVID hardship forbearance if:
Your initial forbearance plan typically lasted 3 to 6 months. If you needed more time to recover financially, you could request an extension. For most loans, your forbearance could be extended up to 12 months. Some loans were eligible for up to 18 months of forbearance, depending on when your initial forbearance started.
(a) Modify your loan.
(b) Refinance your loan.
(c) File Chapter 13 to get caught up.
Let's go through each. Assuming your lender wants to resolve your deficiency for a loan modification, and you qualify for one based on your income and expenses, they can be of two types. First, they could offer you a separate claim modification. This type of adjustment pulls your forbearance balance away and segregates it until your loan is paid in full. It collects no interest, and you are not required to make payments on it. This is often the best outcome for these types of forbearance plans. However, one day, you'll run into that claim again when you want to sell, refinance or pay off your home in full. Be prepared for it as part of your long term plans, and also be aware that refinancing with that claim may be more difficult than without it. Second, they could offer that they modify your entire loan over 30 to 40 more years, including the balance of your forbearance. This is the worst of the two outcomes, likely increasing your payments each month and over time, the amount the mortgage company will receive with interest. It will be much higher than you would have paid had you stayed current. However, this option makes it more likely that you can refinance in the future.
Your second option would be to refinance your home, but you may find it difficult to locate a lender who will work with you after a forbearance. You may need to wait 12 or more months with on time payments to qualify. While refinancing can look attractive, there are many downsides. First, the fees and costs that you might not notice get pumped into the loan, and you will pay tens of thousands of dollars on those over time. Second, oftentimes consumers will use a refinancing to pay off unsecured debt - essentially putting their home at risk over credit cards, and then paying interest over the next 30 years. It's a win for the creditors, but a loss for you, especially over time. Third, interest rates have gone up significantly recently. This can mean hundreds of dollars more per month than you would have paid during the pandemic.
Your third option would be Chapter 13 bankruptcy. Many people have a negative view of bankruptcy in general thanks to the drum beat of negative press from the media and banks, and while it does hit your credit, it is often a perfect choice after major crisis like recessions and pandemics. Chapter 13 will help you get caught up, interest-free, over as long as 60 months. It will often pay your unsecured creditors as little as zero cents on the dollar, and resolve tax debt, vehicle payments and any other debt you might have. It is a one-payment plan, encompassing all of your debt, and often saving you thousands if not tens of thousands of dollars. It stops collections actions, stops foreclosures, and if your mortgage payment is too high to begin with, it can give you an opportunity to handle your other debt while requesting a loan modification within the safety of Chapter 13.
If you have questions about any of these options, reach out to me personally so I can help you guide you on the best one to chose!
- Jesse Sweeney, 248.719.5663
While it's a difficult decision to make, after going through your budget and realizing you can't pay off your debts before the year 3000, you decide to file bankruptcy. But what does it take to plan for a bankruptcy? Is there even such a thing? While there isn't a lot you need to do before filing, except speak to an attorney, there are some things you absolutely want to avoid to make your bankruptcy case as smooth as possible.
1. DON'T GIVE AWAY ANY PROPERTY
One of the biggest mistakes I see before people file bankruptcy is that sometimes they decide to sign the title over to their home or car to a friend or relative 'to protect it from creditors'. Not only won't this protect your property from creditors, but it could put those items at greater risk. In bankruptcy you have the ability to protect some personal property and real estate with state or federal exemptions to a certain extent, and if you cannot protect all of it in a Chapter 7, you can typically in a Chapter 13 case. Even if you don't file a bankruptcy, giving away your property to a family member or friend when you owe your creditors money can be completely set aside by those creditors. Instead, before you act rashly, contact an attorney to go over what you need to do with your big ticket items to ensure they are protected. If you want to see what could go wrong when transferring your property to someone else, check out Tiger King on Netflix.
2. DON'T SELL ANY PROPERTY
As a corollary to the first mistake, this isn't the time to start raising cash. This can present two problems: first, the sale might be closely scrutinized to determine if it was at fair market value. That could mean the trustee in your case contacts the buyer and sets the sale aside. Second, assuming you sell the property and it was exempt, converting it to cash may not protect it at all. Exemptions are different for each type of property. For example, you may be able to exempt thousands of dollars for your personal residence, but much less once it is sold, depending on the circumstance. So do yourself a huge favor – talk to an attorney first before you make any major moves.
3. DON'T BORROW MONEY
If you're filing bankruptcy, now is not the time to borrow money. Why? It looks bad if you borrow on the eve of filing, especially if it's unsecured debt like a line of credit or a credit card. If you borrow money and then file bankruptcy right away, creditors may object to your discharge unless you exclude them from the filing. Moreover, what are you borrowing money for exactly, and where will that money go once it is borrowed? If it's going to buy food, that may not be as big of a problem as going to Disney World, but before you borrow a penny, talk to an attorney. As a corollary to this, don't co-sign on any debts, whether it's for your friend or family member. Not only could you put their co-signed collateral in jeopardy, it may make you chose between your relationship and getting a fresh start from your debt.
4. DON'T PAY FAMILY, FRIENDS OR ASSOCIATES BACK
Borrowing before filing is one thing, but paying back your relative or your buddy who loaned you more then $600 could be a problem. Paying back an 'insider' as they are called, more than $600 in the prior year before filing means that the payment can be clawed back by the trustee and distributed to your creditors. Worse? You may feel morally compelled to pay them once your case is over, and then you'll wind up paying twice. Instead, let your friend or family member know you cannot pay this debt, or any debts and you are filing bankruptcy. Do you believe you must pay them back, no matter the consequences and you don't want the trustee to take this money from then? You can do that, but you're going to need to wait another year to file bankruptcy.
5. DON'T GO ON VACATION
It's certainly not illegal to go on vacation before filing your bankruptcy case, but understand that your bank accounts may be subject to careful examination, and if they see you dropped $1500 to go to Europe a few weeks before filing, they might have reason to believe your case was not filed in good faith. Also, did you have to borrow money to go on that vacation? See number 3 above.
In summary, these are the top 5 things you don't want to do before filing bankruptcy. There are more than these above, but in general, if anything you're trying to do involves more than $600, stop, wait, and seek legal advice. Big moves arouse suspicion. Lay low, and you'll stay under the radar. For more information, feel free to contact me.