Can I Modify My Home Mortgage Through Chapter 13 Bankruptcy?

The short answer to the question “can I modify my home mortgage through chapter 13 bankruptcy?” is NO. The bankruptcy code has a prohibition against changing the terms of a mortgage on your primary residence. There are a couple of exceptions.

Specifically, if you have fallen behind on the mortgage payments, you are allowed, under chapter 13, to catch-up (“cure”) the back-payments over time, and without interest. But you have to remain current on the regular payments while you are doing it. The second exception is for second mortgages (including home equity loans, pool loans and the like). If you can show that the home is “underwater” with regard to the first mortgage (that is the amount owed on the first mortgage exceeds the value of the home) then you can completely eliminate the second mortgage in Chapter 13. This is known as “lien-stripping”. However, you may still have to pay some of this stripped mortgage back depending upon your income level. Also, a plan to strip the second mortgage may have an impact as to whether or not you qualify to file a chapter 13 in the first place! It may be possible to “cram down” a mortgage on investment or rental property. Cram-down refers to the bankruptcy practice of paying the mortgage company the value of the property, plus interest, instead of repaying the full loan amount. However, there are numerous obstacles to overcome in trying to get a cram-down approved. First, there is the issue of valuation. The mortage company might disagree on the value of the property -at which point there would have to be an evidentiary hearing to determine valuation. Assuming the valuation issue is resolved, a second obstacle is that the bankruptcy code requires you to pay the full cram-down amount plus interest amortized over a maximum of 5 years, which typically results in a large monthly payment obligation. The third obstacle is proving that the rents coming in off the property are sufficient to pay this 5-year payment obligation to the mortage company (that is YOU are not subsidizing the cram down with money that could be used to pay other debts back). The fourth obstacle is a two edged sword making sure that your income is not so low that you can’t afford to be in the chapter 13, and not so high that you end up having to pay back more than the cram-down value. So in a nutshell, a modification or cram-down cannot be done in Chapter 13 on the home that you live in, although you can use a chapter 13 to catch up your first mortage and/or eliminate you second mortage. And although a mortgage on rental or investment property can be crammed-down, it really only works for very low end properties which have a solid stream of rental income. And regardless of the situation, you must be eligible for chapter 13 in the first intance and have income within the proper range to make your plan work.