As a rule, the terms of mortgage can only be modified by the mortgage company or the lender. However, in some cases, bankruptcy court can adjust your mortgage in a Chapter 13 bankruptcy case. If you thought that filing for bankruptcy won’t be helpful, you are mistaken, say lawyers of Dallas based law firm Bankruptcy filing can help you qualify for loan modification or provide you with time to pursue alternate options.
Mortgage modification in Chapter 13 bankruptcy
Chapter 13 bankruptcy involves a repayment plan where you repay your creditors over a period of 3-5 years. There are two ways in which mortgage can be modified in a Chapter 13 bankruptcy:
- Lien stripping – In this case you can remove the later (second) mortgage if what you owe on the property is more than the property’s value. This is because, if you end up selling your property (home), there won’t be enough money to pay the 2nd or any other subsequent mortgage, since the money would be used to pay the 1st The 2nd mortgage will be paid like other unsecured debts (medical bills, credit card bills, personal loans etc.). The lien goes away after the completion of the repayment plan.
- Cramdown – In this case, you pay only for the value of the property as per your repayment plan. The remaining balance gets paid along with other unsecured creditors. Thus, you end up keeping the property by paying for what it is worth. The remaining amount gets wiped out along with other unsecured debts at the end of your repayment plan. Unfortunately, people cannot meet the requirements for cramdown. It can be used for real estate in Chapter 13 bankruptcy if you had used property other than your residence (like a car) as collateral or the loan had been used in any of the following ways:
- To purchase an investment property
- To purchase property apart from your residence like farmland or apartment building
- To purchase a mobile home which is a personal property but not a real home
Unfortunately, you end up paying the entire reduced loan amount during the repayment plan, which is not possible for many people.
Loan modification in bankruptcy
Unfortunately, if you aren’t eligible for lien stripping or cramdown, you can still modify your loan during bankruptcy:
- Chapter 13 bankruptcy: In case your mortgage payments are behind, you can propose a plan to catch up on payments through your repayment plan. You can also ask the mortgage companies to modify the terms to lower the payment so that you can catch up on payments. The bankruptcy court can approve loan modification which can change the terms of your repayment plan. An experienced lawyer can help you with the process.
- Chapter 7 bankruptcy: Unfortunately, there is no provision in this chapter to modify mortgage terms through bankruptcy court, including lien stripping and cramdown. If you wish to keep any exempted property in Chapter 7 bankruptcy, you need to make arrangements to pay the mortgage by reaffirming the debt (by paying as per original agreement). You might even get a chance to redeem the property by paying the entire amount due on it in a lump sum. However, this is not possible for the primary residence. You can ask the lender for a loan modification, however, there is no guarantee that it will be approved.
Mortgage modification is complicated in bankruptcy and you should avoid making any errors or you might end up losing equity in the property. If you need consultation with a bankruptcy lawyer, you can call (888-297-6203).