Some residential mortgages can be modified in chapter 13

14 Mar Some residential mortgages can be modified in chapter 13

We know that Congress squelched the proposal that mortgages on your home could be modified in chapter 13. Too bad. Mortgage foreclosures went ahead at the highest pace in recent history as a result. Mortgage modifications are as rare as hen’s teeth.

Some mortgages, however, can be modified.

The key is that mortgages on your home can be modified when the mortgage is not the only security given for the loan.

For example, a client gave the bank a mortgage on their home to further secure a loan on their business, a liquor store. The liquor store failed.

Normally, you can’t eliminate a mortgage on your home except in chapter 13 and then only if the lien is totally unsecured – meaning your house is worth less than the mortgages which come ahead of the lien you want to eliminate.

However, in the case of the bank’s lien which was also given to secure the debt on the liquor store and its assets, it doesn’t matter if the mortgage is fully secured, partially secured or undersecured. The mortgage can be modified. It can be broken into two parts. The secured part can be paid over a period of 5 years at a reduced interest rate. The unsecured part can be lumped in with all other unsecured debts and is paid to the extent that it can be from the debtor’s projected disposable income over 5 years under a chapter 13 plan – with no interest.

Some creative lawyers are now arguing that residential mortgage loans further secured by a tax escrow can be modified in chapter 13 just like the mortgage further securing the liquor store loan. Whether that will be allowed remains to be seen.

Rely on creative attorneys on the Bankruptcy Law Network to help you solve your financial problems.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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