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LOAN MODIFICATIONS AND BANKRUPTCY

Former NFL star, Mr. Eddie George, is set to lose his million-dollar home to foreclosure on June 7, 2012. For many months, Mr. George, through his accountant and agents (presumably all highly competent and paid), has been working towards a loan modification with their mortgage lender. For months, Mr. George's party has been opimistic that foreclosure would be avoided and a restructuring or modification of their loan would allow them to keep their home based on new, lower payments. Now, with less than a week before an official sale date, Mr. George and his camp are scrambling to find a solution.

Does this sound familiar? If you or someone you know is in this similar predicament, do not lose hope!

First off, it is essential to understand that no bank is under an obligation to modify the terms of their loans with you as a home owner. In other words, when you first purchased your home, you entered into a binding contract to pay a certain amount, based on certain interest rates for a certain amount of years. The moment you fail to tender payment based on these original terms, you have breached the contract and the bank can then initiate any procedures (according to both the terms of the contract and state law) to remedy the breach and lessen their damages. You may be saying, the government bailed out the banks with millions (or is it billions?), the banks never lose and here we are, the little people, about to lose the only place we can call home. I wholeheartedly agree with you, but it's important to keep our focus on realities so we can better prepare for better outcomes.

Assuming you have breached your contract with the bank by failing to make payments, the bank can then (eventually) start foreclosure proceedings. These generally take several months and in California, a bank cannot set a sale date unless they have officially served a Notice of Default (NOD). After serving this NOD, the bank must wait a minimum of 111 before setting a sale date. This is about 3.5 months.

In the meantime, you as the homeowner have heard that your neighbors, family or friends have engaged in attempts to modify their home loans, some with failure, others with great success, some even getting a principal reduction in their mortgages (including their 1st mortgage). So, you diligently explore your options in an effort to qualify under one of the many loan modification programs available to homeowners. Then comes your first issue: the foreclosure department in the bank continues to count down to a sale date without much regard for your attempts to modify your loan or news from the loan modification department (in that same bank no less) in favor of your potential loan modification. The clock is ticking and it's not looking good.

This happens more often than people think, and it's no surprise when a client comes into my office and says, "but the banks are working on a loan mod for me, how can they turn around now and threaten to take my home away?" For that answer, reread above.

This is when we come in and offer the following advice: we must act quickly in an effort to save that home through the courts. This means preparing for the filing of a bankruptcy petition under either Chapter 7 or Chapter 13 of the Bankruptcy Code. Filing for bankruptcy relief, especially under Chapter 13, has always been an effective way to save a home along with stripping mortgages which are fully unsecured (through what are called LAM motions).

Filing under either chapter will give you an opportunity to 1) catch your breath and avoid the oncoming train and 2) plan a better strategy which can include another loan modification while protected by the bankruptcy court or curing your arrears through the use of the courts in a Chapter 13.

Keep in mind that many clients have successfully attempted loan modifications on their homes while under bankruptcy protection, while most others, through our representation, have found solace in the court's ability to allow the homeowner up to 60 months to cure their late payments (arrears) on their home.

These alternatives far outweigh gambling on a loan modification while the bank continues to secretly plan its foreclosure of your home. But, like everything in life, try not to wait till it's too late. While we at Barrios & Machado are known to work around the clock to avoid an emergency such as foreclosure, it behooves our clients to give us as much possible notice, so that we can plan accordingly and give you, the client, the best possible chance to succeed. But if you do nothing and rely on bank's promises that they will bail you out, be warned: I've seen this end in tragedy far too many times.

In short, do not become another Eddie George.

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