Why Mortgage Modifications Sometimes Lead To Bankruptcy

Mortgage Modifications and Bankruptcy

The foreclosure prevention programs created by the government and nearly ignored by the mortgage industry were supposed to save millions of Americans’ homes.  But several years later we are in the same foreclosure mess we started with.  A matter of fact, a disproportionate number of homeowners with mortgage modifications end up in foreclosure and even bankruptcy despite their best efforts. Why is that?

Modifications Can’t Purge Toxic Mortgages

Many of the homeowners who received mortgage modifications only experienced slight reductions in their monthly mortgage.  Many of those homeowners facing foreclosure came to the table with mortgages which were simply toxic and cannot be cured with modifications unless the terms of the loan are changed and the principal on the mortgage is slashed. Mortgage industry leaders simply aren’t willing to take those two drastic measures. That’s why many homeowners seek bankruptcy protection after their modification doesn’t improve their financial position.

Unable To Pay Modified Mortgage Due To Job Loss

The amount of homeowners losing their jobs is unfortunately still high.  Even with a modified mortgage, a homeowner who has other financial responsibilities cannot afford to pay their mortgage.  Some homeowners find that bankruptcy can allow them to hold onto their home if they have unemployment insurance or other income coming in even if they don’t have a job.

Foreclosure Is Part Of A Larger Debt Problem

Most debtors facing foreclosure and seeking a mortgage modification have other debt troubles. If they are delinquent on credit cards , taxes , student loans , car payments and other debts, mortgage modification won’t solve those other problems.  Bankruptcy allows them to discharge many debts and gives them a real chance of saving their home from foreclosure.