Is Bankruptcy or Loan Modification Better for Stopping Foreclosure in Pennsylvania?

Loan modification and bankruptcy are two different approaches to addressing the threat of foreclosure. Loan modification might only pause foreclosure, while bankruptcy might stop it altogether, and is typically the better option for debtors in extreme financial distress.

Loan modification is not always an option, either. You cannot modify your mortgage without the bank’s approval, and the bank does not have to change the loan terms. While our lawyers may suggest loan modification if you are facing temporary financial hardship, we may suggest bankruptcy if a sheriff’s sale is looming. Bankruptcy is also a more effective way to prevent foreclosure for homeowners with debts other than mortgage debt. Bankruptcy is only effective at stopping foreclosure when homeowners choose the right chapter, which our lawyers can help ensure.

Call Young, Marr, Mallis & Associates today at (215) 701-6519 for a free case evaluation from our Pennsylvania bankruptcy lawyers.

When is a Loan Modification Better for Stopping Foreclosure in Pennsylvania?

Instead of going to court for a bankruptcy case, loan modification allows homeowners to negotiate with lenders and alter their existing mortgage contracts. While lenders aren’t always willing to engage in loan modification, our lawyers can see if it is the right option to stop foreclosure in your case.

Suppose your mortgage is the only loan you have defaulted on, and you have a long-standing history of making timely payments to your lender. If we do not have to worry about repaying other debts as well, we can focus on negotiating new mortgage terms that both you and the lender can live with, if the lender is willing.

With a loan modification, you and your lender agree to changes, but you must continue making your mortgage payments as scheduled. Because of this, loan modification is generally only suitable for those facing temporary financial hardship, and do not require a total temporary stay on mortgage payments.

Lenders don’t have to agree to loan modification, so it isn’t an option for all homeowners facing foreclosure in Pennsylvania. It’s also only well-suited for particular situations, so our lawyers may not recommend it in your case.

When is Bankruptcy Better for Stopping Foreclosure?

Bankruptcy first stops foreclosure by putting an automatic stay on all payments. Rather than renegotiating terms with your lender and continuing to make payments, you’ll receive a pause on all mortgage payments as we navigate your bankruptcy case and create a repayment plan.

Foreclosure Letter Received

If you have already received a notice of foreclosure from your bank, you may need to file for bankruptcy to prevent foreclosure. At this point, the bank may not be willing to discuss loan modification seriously. It can proceed relatively quickly with foreclosure if you do not file for bankruptcy or “cure” your mortgage, meaning make all outstanding payments.

Ongoing Financial Hardship

If you’ve begun defaulting on your mortgage loan because of ongoing financial hardship, bankruptcy may be the best option to stop foreclosure in your case. Illness, death, and divorce can significantly change a homeowner’s income and ability to pay their current mortgage for the foreseeable future. If you don’t expect your financial situation to change any time soon, allow our lawyers to file a bankruptcy petition on your behalf in Pennsylvania.

Loan Modification Request Denied

Your lender has no obligation to discuss loan modification. Even if this is your first time defaulting on your loan and you approach the lender immediately after falling only slightly behind, the bank may still deny your request. When this happens, the best option to protect your house from foreclosure may be to file for bankruptcy, which can offer a long-term solution to your problem.

Impending Sheriff’s Sale

Once you get notice of a sheriff’s sale, the automatic stay from a bankruptcy case may be the only way to stop foreclosure and keep your house. The lender must give you at least a 30-day notice of a sheriff’s sale of your home. Although 30 days is not a long time, our Pennsylvania bankruptcy lawyers can prepare and file a bankruptcy petition within this timeframe. As long as the automatic stay goes into effect before the sheriff’s sale concludes, the bank cannot move forward with taking and selling your home.

Additional Debts

Even if you are relatively up to date with your mortgage payments, having other debts could put you at risk of losing your home. Other creditors might seek repayment by any means possible, potentially forcing you into a sale. While this is not the same as foreclosure, it does yield a very similar result. Loan modification may not be an option if you have other debts that must be addressed, but filing for bankruptcy can be.

What Type of Bankruptcy is Better for Stopping Foreclosure?

Not all bankruptcy chapters for consumers are as effective at stopping foreclosure. While virtually all bankruptcy cases receive an automatic stay, Chapter 13 addresses debt differently and is best suited for preventing foreclosure altogether.

You might not permanently stop foreclosure if you file Chapter 7 bankruptcy. This bankruptcy chapter liquidates the debtor’s assets to repay creditors, such as mortgage lenders. For most debtors, their biggest asset is their home, so Chapter 7 is not the best for protecting their house.

Pennsylvania doesn’t have a homestead exemption that lets debtors exempt their homes from liquidation, making filing Chapter 7 very risky if you’re facing foreclosure.

Chapter 13 is preferred for stopping foreclosure. Chapter 13 forces the lender to negotiate a new payment plan, which may even result in a total restructuring of the mortgage, making it more affordable for the homeowner. There is no risk of asset liquidation during Chapter 13 bankruptcy, provided that debtors complete their repayment plans in full.

Get Help with Your Bankruptcy Case in Pennsylvania Today

Call Young, Marr, Mallis & Associates at (215) 701-6519 for a free case discussion with our Philadelphia, PA bankruptcy lawyers.