Struggling after a job loss: should I consider a loan modification or bankruptcy?

Millions of homeowners are struggling to make their mortgage payments; unemployment being a big reason why. So what are your options if you have lost your job and can no longer afford your monthly mortgage payments? Do you file for bankruptcy or try to modify your mortgage? Here is the latest segment of our “Ask the Expert” series which explores that exact topic:

Q: My husband and I are struggling since I got laid off of my 17-year job. I am 61 years old and jobs are scarce to say the least.  We are considering a loan modification on our home and possibly bankruptcy. Would either negatively affect the other?


A: Bankruptcy can take a number of forms, from virtually a complete absolution of most of your debt to a simple reorganization of payment plans.

Bankruptcy can be a time-consuming task, and will come with both costs and the need for an attorney to direct the process. For most, bankruptcy is a last resort, and hopefully, you'll never need to go this route, as it has long-ranging repercussions on your ability to obtain credit in the future.

Government loan modification

A loan modification won't provide relief from all your debts, but it may be sufficient to give you the breathing room you need, at least for a while.

A loan modification is a voluntary process, one which you begin by initiating a discussion with your mortgage servicer. If your mortgage is owned or backed by Fannie Mae or Freddie Mac, lenders will generally use the guidelines of the Home Affordable Mortgage Program (HAMP) to determine if your loan can be modified.

Private loan modification

If it's a "private", non-Fannie, non-Freddie mortgage, you still have loan-mod options. Please know that many lenders are actively doing "proprietary" modifications for mortgages they hold rather than through a government-supervised program such as HAMP. Modifications here are the result of direct one-on-one conversations with the lender to try to determine the best overall outcomes for you and them.

You can learn more about HAMP eligibility guidelines and whether your loan is owned or guaranteed by Fannie Mae or Freddie Mac here:

Preparing for a loan modification

For either form of loan modification you'll need to prove hardship (job loss/loss of income is chief among these), and provide plenty of supporting documentation to the lender for your income and debt loads, so be prepared to get your paperwork together. You'll also need to be diligent and timely in your contact and provision of these items.

 However, all of this begins with a conversation with your mortgage servicer.

Usually, you'll find their number or website address on your mortgage bill or statement. A loan modification certainly does not preclude filing for bankruptcy at some point and you still may wish to contact an attorney to discuss your situation.

Ask the expert
Keith Gumbinger
Keith Gumbinger
Mortgage Expert
Vice President,
About Keith: Mortgage market observer and analyst with 35 years experience... (more)
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