The current economic situation does not favor all. It has become a common scenario to find people fighting to avoid default of loan payment by opting for loan modifications or just giving up by filing for bankruptcy. It is not a desirable situation for a person when he applies for loan with bad credit. However, bankruptcy may not be the favored solution as it might affect loan modifications sought by borrower on his mortgaged property. Hence, the borrower has to understand the implications of seeking loan modification and applying for bankruptcy to turn the tide in his favor.

Loan Modification and Its Types

When a borrower finds the going tough, he might request for modification of loan. Lenders agree to loan modifications to avoid the risk of default by the borrower. Let us have a look at some of the types of loan modifications.

  • Extension of repayment term is the most common type of loan modification. Here, the borrower gets a breather, as he has to pay lesser monthly payments. This might help to avoid default.
  • Reducing interest rate helps the borrower. This is a better arrangement for the borrower when compared to extension of repayment term. In some cases, the lender could accept temporary rate reduction. The original rate of interest will be charged after an agreed period.
  • Reduction in balance loan amount is better than the reduction in interest rate as far as the borrower is concerned. Once reduced, there is no going back and hence this is the best option for the borrower. However, a lender might find this favorable to him only if the borrower agrees to settle the reduced balance amount in one full stroke.

When a loan modification has been agreed upon, the trial period begins for the borrower to assess his ability to meet the modification. If the borrower keeps with his commitment during the trial period, the loan modification gains permanent status until the loan is settled.

Types of Bankruptcies

Two major personal bankruptcies types are Chapter 7 and Chapter 13. While Chapter 7 allows for liquidation of non-exempt properties of the borrower to pay off the lenders, Chapter 13 offers safer option to the borrower by protecting his properties. Here, the borrower might be required to repay the loan within 5 years.

Loan Modification and Bankruptcy

If the borrower looks to reaffirm his mortgage loan, it would be wiser to have loan modification terms in black and white. However, it would be better to avoid reaffirmation of mortgage property. If the borrower were planning to file for bankruptcy, it would be better to go for loan modification prior to filing bankruptcy. If the loan modification process is completed before bankruptcy, the modifications will not be affected by filing of bankruptcy. The borrower has to honor his commitments to modified loan to stay clear of the affects of bankruptcy.

Though unsecured creditors favorably consider those who apply for loan with bad credit, history of bankruptcy filing may intrude the sanction of loan. This is one of the potential dangers of filing bankruptcy. With proper professional counseling, the borrower could ensure that his loan modification remains unaffected by his filing for bankruptcy.