The Only Mortgage Modification That Will Work Is Found In Chapter 13

30 Oct The Only Mortgage Modification That Will Work Is Found In Chapter 13

The plans to help homeowners who are facing the loss of their homes are doomed for failure. They are expensive, impractical and will only help a portion of those who need help. Carmen Dellutri’s recent article on these pages shows why mortgage modifications are still not working. There is one idea, however, that will work. It is simple, cheap, and needs no new structure to make it work. If you listened to the vice-presidential debate you heard Joe Biden mention it – allow people to modify their mortgages in Chapter 13 bankruptcy.

The idea is not crazy. In fact, it already happens…for family farmers in Chapter 12. In Chapter 12, a family farmer can modify the mortgage on their farm by lowering the principal to what the farm is worth, lowering the interest rate and changing the overall term of the loan. Farmers have been modifying their mortgages and farm loans in this manner for years, and it has been working smoothly.

Allowing people to modify their home mortgages in Chapter 13 would be to everyone’s benefit, even the mortgage company. Let’s look at an example:

Your neighbor owns a home that is worth $100,000 in today’s market. They refinanced a few years ago, when the home was “appraised” at $150,000, and the mortgage balance is currently $150,000. Your neighbors can no longer afford their mortgage payments. The mortgage company is getting nothing, and begins the foreclosure process.

The foreclosure will cost the mortgage company quite a bit, and in many parts of the country it will take many months. Even after the foreclosure is completed, it could take more time and money to get your neighbors out of the home. By the time they finally get them out, the value of the home (which was $100,000) could be greatly reduced, perhaps $70,000.

So the mortgage company spends over $10,000 and gets the home back with another $30,000 loss in value. They end up with a net of $70,000 (if they are lucky). They are taking a total loss of $80,000, your neighbors are out of their home, and your property has lost value. Everybody loses.

On the other hand, if your neighbors could modify their mortgage in a Chapter 13, they could lower the principal to $100,000, lower the interest to 6%, and lower their monthly mortgage payments to an amount they can afford. They keep their home, the mortgage company gets quite a bit more than they would have through foreclosure, and your home value doesn’t lose its value.

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.
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