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How New Debt Restructuring Tools Can Help Struggling Homeowners

By Spodek Law Group | February 20, 2024

How New Debt Restructuring Tools Can Help Struggling Homeowners

Many homeowners have struggled financially since the 2008 housing crisis, with high mortgage debt burdens and trouble making payments. However, new debt restructuring tools are emerging that could provide meaningful relief. This article explores options like mortgage modifications, federal housing programs, bankruptcy, and debt settlement that could help homeowners get back on stable footing.

Mortgage Modifications

One of the best options for struggling homeowners is to get a mortgage modification from their lender (examples from reddit, Quora). This restructures the terms of the loan to make payments more affordable. Modifications may:

  • Lower the interest rate
  • Extend the repayment term
  • Defer principal payments

According to the Consumer Financial Protection Bureau (CFPB), over 1 million homeowners have received permanent modifications since 2008.

To get approved, you’ll need to submit an application and proof of financial hardship to your lender. Non-profit housing counselors from organizations like HUD can help navigate the process. Lenders are generally more motivated to modify loans rather than foreclose.

Federal Housing Programs

The government also offers programs to help with mortgage payments, including:

  • FHA-HAMP: Modifications for FHA-insured loans, with lower rates and principal deferral.
  • HARP: Refinances higher-rate mortgages into lower current rates under Fannie Mae and Freddie Mac.
  • HAFA: Deed-in-lieu of foreclosure and short sale options let homeowners transition out of unaffordable homes while avoiding foreclosure.

These programs have strict eligibility criteria but don’t require lump-sum repayments. Non-profit counselors can also assist with applying.

Bankruptcy Options

Filing for bankruptcy stops collections and foreclosures while debts get reorganized or erased. Two main types help homeowners:

Chapter 13 Bankruptcy: Gets rid of second mortgages and allows homeowners up to 5 years to catch up on payments through a court-ordered repayment plan.

Chapter 7 Bankruptcy: Liquidates assets to pay debts, while exempting homes from collections. Allows homeowners to keep properties without mortgage payments temporarily or permanently.

Bankruptcy damages credit scores but could save a home. Outcomes depend on state exemption laws. Legal counsel provides the best chance for success.

Debt Settlement

Debt settlement firms negotiate with mortgage lenders to reduce balances owed. They often get 25-50% knocked off principal amounts, making payments more affordable.

Settlements happen in a lump sum or through a 2-4 year installment plan. The firm must have expertise in mortgages for the best results. While fees often reach 15-25% of enrolled debt, it could still save homeowners money long-term.

Debt settlement damage credit but help avoid foreclosure. Non-profit agencies provide services for free.

Finding the Right Solution

Every homeowner’s situation is different, so meet with a housing counselor through HUD or the National Foundation for Credit Counseling to review all options. They help create affordable plans and assist with applications for free.

Acting quickly gives homeowners the best chance of success. Lenders and courts look more favorably on homeowners who seek help right away. While programs can take 3-6 months for approvals, they ultimately provide the relief needed to recover and move forward.

Resources

HUD-Approved Housing Counselors: Search for non-profit agencies in your state that provide free assistance with evaluations and applications: HUD.gov Counseling Agency Finder

Mortgage Modification Information: Detailed information on different modification programs from the Consumer Financial Protection Bureau: Mortgage Modifications from CFPB

Bankruptcy Overviews: High-level explanations of Chapters 7 and 13 bankruptcies from the US Courts website: US Courts Bankruptcy Overviews

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