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Mortgage Modification and Bankruptcy

Many homeowners wonder if they still have a chance at modifying their mortgage if they file bankruptcy. A loan modification is a process that changes or modifies the original terms of the mortgage. A modification can change the interest rate, lower the monthly payment and some modifications even forgive part of your mortgage loan balance.

When a home loan goes into default it could mean foreclosure and have serious repercussions. If a mortgage is already modified prior to the debtor filing for bankruptcy it does not affect the modification in most cases, however if there is a current modification in process but not completed and the homeowner files bankruptcy, it could stop the process until the court approved the request for a modification.

There are two primary types of bankruptcies for individuals Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy, a debtor’s non-exempt assets are liquidated to pay off creditors, but remaining debts are canceled. A Chapter 13 bankruptcy provides more protection for the debtor’s belongings, and it requires the debtor to develop a plan to repay debts over a period of three or five years. Loan modifications typically do not apply in Chapter 7 bankruptcies, but the court sometimes can mandate a loan modification in a Chapter 13 bankruptcy.

In most modifications the borrower enters into a “Trial Plan” period which is usually over a 3 month period. This is done to make sure the modification is the right one for the borrower and that the borrower can afford to maintain the new monthly payment. If the trial period is a success the borrower remains on the modification and it becomes permanent.

If, on the other hand the borrower does not maintain the trial payments they are then essentially removed from the program and the mortgage reverts to its original terms.  In some instances, where the borrower files for bankruptcy during the trial period the bankruptcy court and the lender must approve the modification for it to become effective. Modifications are becoming more common in Chapter 13 bankruptcies across the country.

It is important when considering a loan modification and bankruptcy, to seek an experienced bankruptcy attorney that can advise you in your case. This will save you a lot of headaches in the future if you know what to expect regarding you modification. An affordable and experienced attorney in the Phoenix, AZ area is easy to find. Ariano & Reppucci, PLLC have years of experience and knowledge in the bankruptcy field and can review your circumstances.

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