A mortgage is agreement between a property owner and a mortgage company giving the mortgage company an interest (a lien) in property as security for money lent by the mortgage company. Generally, only the lender (the mortgage company) can modify the terms of the agreement.
The bankruptcy court can only modify that agreement in limited circumstances, and only in a Chapter 13 bankruptcy case. But, a bankruptcy filing may be able to help you qualify for a loan modification, or at least give you time to pursue that option.
Chapter 13 Mortgage Modification
In a Chapter 13, you propose a plan to pay something back to your creditors over a three to five year time period. There are two ways that a Chapter 13 can modify a mortgage, lien stripping or cram down.
Lien stripping is allowed only when there is no value in the property to secure the mortgage. It usually applies to second, or later, mortgages. For instance, if your house is worth $100,000.00 and you have a first mortgage of $105,000.00, and a second mortgage of $15,000.00, you can strip the second mortgage because the first mortgage is more than what is owed on the house. All the value of the house is used up by the first mortgage and there is no value to secure the second mortgage. In this instance, the second mortgage can be stripped in a Chapter 13 and paid as an unsecured debt.
A cram down is only available in a Chapter 13 for real estate if:
• the loan is secured by more than just your residence (such as your car or stocks)
• the loan was used to purchase an investment property that you don’t live in
• the loan was used to purchase your residence and other property that is not part of your residence (such as farmland)
• the loan was used to purchase a mobile home that is personal property and not real property
A cram down means that you are paying only the value in full through the plan. The remainder of the balance is paid with other unsecured creditors. The drawback to a cram down is that you must pay the value in full during the plan, which may not be possible for many people.
Loan Modification In Chapter 13
If your mortgage is not eligible for lien stripping or a cram down, you can still ask the mortgage company to modify the mortgage while you’re in a Chapter 13 plan. In Chapter 13, if your mortgage payments are behind, you will propose a plan that catches up the payments and resumes regular, on-going payments.
You can also ask the mortgage company to modify the terms of the mortgage to lower the payments, and/or catch up the payments that are behind. Any loan modification will have to be approved by the bankruptcy court, and once approved, will likely change the terms of your plan.
It is important to have an experienced attorney to help you through the process. There are many steps to take and multiple documents that will have to be filed with the court, so a good attorney will be a big help in getting it done correctly. If the loan modification is not approved by the lender, you still have the Chapter 13 plan as a back up to save your property from foreclosure.
Chapter 7 And Mortgage Modification
There is no process available in a Chapter 7 case to modify the terms of a mortgage through the bankruptcy court. Lien stripping and cram down are not allowed in a Chapter 7 case. If you want to keep otherwise exempt property in a Chapter 7, you need to make arrangements to continue paying the mortgage by reaffirming the debt (agreeing to continuing paying the original agreement), or redeem the property by paying the value of the property in a lump sum (not usually an option for real estate).
However, you can still ask the lender for a loan modification. One of the requirements for a loan modification is a certain debt to income ratio. Often, people with a lot of debt do not qualify for a loan modification because their debt to income ratio is too high, that is, they have too much debt. Filing a chapter 7 can get rid of unsecured debts like credit cards and medical bills. Getting rid of those debts can lower your debt to income ratio, which helps you to qualify for a loan modification from your lender.
If you have a mortgage that you can’t afford, be careful about reaffirming that debt, thinking that you can get a loan modification. If you reaffirm, your legal obligation to pay that debt is not discharged. You still owe it after your bankruptcy case. If you can’t get a loan modification and you default on the mortgage and the property is foreclosed, you are legally liable for any deficiency balance (difference between what was owed and what the property sold for).
You do not have to reaffirm to get a loan modification. If you can’t afford the mortgage payments without a loan modification, don’t reaffirm the debt. That way, if you don’t get the loan modification, you aren’t obligated on the loan after you receive your discharge.