What to Do If You've Been Denied for a Loan Modification

The first place to seek loan modification is with your existing lender. If your financial situation has changed, your lender may be understanding to your new needs and modify your loan with minimum consequence. At times, though, the lender will deny your request because it is unfavorable to their profit. You then need to seek external loans that will allow you to close your existing loan satisfactorily.

Loan Refinance

The most basic type of modification to pursue from an outside lender is a straight loan refinance. You will take out a new loan in a sum large enough to cover the remaining principal, interest and prepayment fees on your existing loan. The new loan should have a more favorable interest rate for the refinance to make good financial sense. However, it is also possible to refinance if you can no longer afford the monthly payments on your current loan. Once you use the new loan to pay off the old, you are released of obligation to the original lender and begin payments to the new lender.

 A cash-out refinance allows you to take a loan larger than the required amount needed to close your previous debt. The remaining sum goes into your pocket to be used at your discretion. You will actually be going deeper into debt with this type of loan, so this option should be used cautiously and the money spent wisely.

Debt Consolidation and Settlement

If you would like to close your loan for less than you actually owe, you will need to pursue some type of consolidation or settlement. Settlement allows you to pay less than you owe total on the loan in one, immediate lump sum. Lenders may accept this offer because they receive funds right away rather than in installments over time. If you have more than one debt to close, you can settle multiple loans at once through consolidation, which is basically using one loan to settle many.

While there are a number of rewards to a successful consolidation or settlement, there are also penalties. You will have a black mark on your credit score making future loans less affordable. It is advisable to pursue this option only if you are unable to continue with your current loan payments or stand to save a sum of money large enough to make up for the penalties.

Going to Court

If you cannot achieve the modification you need through these options, then allowing a court to settle the debt is your final choice. You can declare Chapter 13 bankruptcy, if you are eligible. This type of bankruptcy is a reorganization of loans, meaning you can keep your assets but must establish a monthly payment plan. Remember that a bankruptcy will still appear on your credit score.

Those who do not qualify for bankruptcy can attempt to have the court reorganize or settle the debt by showing they cannot reasonably pay the debt as it stands today. You will need to show you made an honest effort to pay the debt. This is the hardest route to take, and it is only granted in rare circumstances and up to the court to decide the terms and repayment plans.