By Ryan C. Wood
One of the most frequently asked questions during my consultations with clients is “Can I modify my mortgage in bankruptcy?” This question is very reasonable given that most of our clients own houses with mortgages that exceed what their house is worth. The answer depends on the circumstances.
As discussed in my previous articles, one of the major benefits of filing a Chapter 13 bankruptcy is the ability to get rid of junior liens recorded against a house if the senior lien is underwater. Getting rid of junior liens has helped a lot of homeowners keep their homes. However, sometimes filing bankruptcy and getting rid of a second mortgage still not enough to help some homeowners because their house is heavily underwater. Consider the following example: Your house is currently worth $180,000, first mortgage is $300,000 and there is a home equity line of credit for $150,000. Yes, it is a huge advantage for a homeowner to get rid of the $150,000 home equity line in the Chapter 13 bankruptcy, but even without the $150,000 equity line of credit, the house is still underwater about $120,000.
Can anything be done about this? Can the first mortgage be modified in a Chapter 13 bankruptcy case? The ability to modify the first mortgage depends on whether the house is considered a primary residence or an investment property. Pursuant to 11 U.S.C. §1322(b)(2), a Chapter 13 plan may “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence…” This means that homeowners may modify their mortgages in a Chapter 13 bankruptcy case as long as the mortgage is not for their primary residence. This is unfortunate since that is precisely what most homeowners need right now – the ability to modify the first mortgage of their primary residence. There are currently no laws in place that would allow the modification of the first mortgage on a primary residence, but we can always hope that Congress will enact some laws in the future that will help homeowners with their underwater homes.
On a more positive note, 11 U.S.C. §1322(b)(2) of Bankruptcy Code indicates that mortgages on an investment property can be modified. In the example above, the first mortgage of $300,000 can be decreased in a Chapter 13 bankruptcy case to the fair market value of the home: $180,000. The only catch is that the homeowner would have to pay the entire $180,000 in the Chapter 13 plan in order to take advantage of the modification. Chapter 13 plan cannot be stretched to more than 5 years (60 months). Therefore, assuming a 5-year Chapter 13 plan, the minimum Chapter 13 monthly payment would need to be at least $3,000 ($180,000 / 60). In some jurisdictions you can propose to pay interest only to the mortgage company and then make a balloon payment during the last six months of the chapter 13 plan. Please keep in mind that this is a very simplistic calculation geared more towards understanding the concept rather than the actual calculation. There is normally interest and other fees that would be added to this Chapter 13 monthly payment plan. The ability to modify mortgages for investment property is unfortunately seldom used mainly due to the fact that homeowners would have to pay for the entire modified amount in their Chapter 13 plans under most circumstances. Modifying a mortgage for an investment property would be great for people who own investment properties in areas with very depressed home values.