4 Reasons to Choose Loan Modification over Bankruptcy

During difficult economic times, many homeowners are forced to make a tough decision – do I file for bankruptcy, or is loan modification a better choice? Generally speaking, a person should avoid bankruptcy at all costs because it ruins your credit score and can haunt you for years to come. Let’s examine four reasons that a homeowner should choose loan modification over bankruptcy.

1. Bankruptcy Does Not Guarantee You’ll Escape Foreclosure

If the end result is to remain in your home, receiving a loan modification can help you accomplish this more so than filing for bankruptcy. Filing for bankruptcy only guarantees that the lender will stop asking you to pay off your mortgage; however, the bank still has the right to foreclose on your home and force you to vacate the residence. Bankruptcy, in other words, makes you powerless to control what happens to your home.

2. Loan Modification Helps Your Remain in your Home

A loan modification, on the other hand, allows financially-struggling mortgage holders the ability to restructure their home loan to make it more affordable. This is usually done by extending the loan term or reducing the loan’s interest rate to make the monthly mortgage payment significantly lower. Through loan modification, struggling homeowners can not only remain in their home and avoid foreclosure, they can also increase cash flow by receiving a lower monthly mortgage payment.

3. Bankruptcy Ruins Your Credit

If high school students were told that their credit score would impact their life much more than their SAT score, they probably wouldn’t believe you. But it’s the truth. Your credit score affects many aspects of your life, including your ability to receive a loan, a credit card, affordable insurance, an apartment, or even a job. A low credit score sends a red flag to lenders and other businesses, telling them that you are a bad financial risk.

Nothing affects your credit score more than bankruptcy. It takes at least seven years before you can even begin to improve your credit after filing for bankruptcy. In fact, individuals who file for bankruptcy often have difficulty ever receiving a mortgage or consumer loan, even years later. For the lucky ones who do receive a loan after filing for bankruptcy, it’s highly likely that the loan will be unaffordable due to a very high interest rate. Lenders increase a loan’s interest rate to protect themselves against high-risk borrowers. 

4. Loan Modification can Improve your Credit Score

Loan modification does not hurt your credit score as much as a bankruptcy because you’re continuing to pay down your mortgage each month. This proves to lenders that you are a responsible borrower, even during times of financial turmoil. In some cases, homeowners who seek a loan modification over bankruptcy often increase in their credit score by making their modified, lower mortgage payment in-full and on-time each month.

In the end, it’s always best to settle your debts rather than file for bankruptcy. Bankruptcy is a permanent mark on your record that banks and lenders will see for years and years to come. Loan modification can help you lower your monthly mortgage payment, remain in your home, and even improve your credit score.