Chapter 13 Bankruptcy Time Bomb: Mortgage Modification

One of the major benefits of Chapter 13 Bankruptcy is the ability to
avoid second mortgages that are not secured by any value in your home.
 By following standards outlined in the Banrkuptcy Code, you can
reclassify that loan on your home into the same category as credit
cards or other ordinary bills and discharge them at the end of your
Chapter 13 payment plan.  This is called lien stripping. You cannot do
this to a mortgage in a Chapter 7 case.

However, if there is even a penny of value in the home that would go
to a second mortgage when the property was sold, the loan cannot be
valued as unsecured.  That means it must be paid during the Chapter 13
case and it also survives the Chapter 13 as a lien on the property
until it s paid off.

So where's the Time Bomb?  Let's assume that you've been dealing with
your lender trying to work out a modification of your first mortgage.
Well, what if your lender were to give you a modification that reduces
your principal balance?  That modification now results in a little
equity in your home.  Sounds like good news, right?  Nope.  With the
reduction in the principal balance gives your second mortgage a
toe-hold onto your home. Once that happens, the Bankruptcy Code will
not allow you to avoid that second mortgage and gain the benefit of a
Chapter 13 case.

In a New York Times article, reporter Gretchen Morgenson criticized
the terms of the "Great Mortgage Deal" with five major banks,  Once of
the points she brings out is that this "settlement" enhances the value
of the second mortgage market.  By creating equity in homes, the value
is now exposed to claims by second mortgage holders in a Chapter 13
thus weighing down homeowners with yet another obligation that
survives a bankruptcy.  Once your first mortgage is reduced below the
value of your home, the second mortgage will sink its claws into that
home.  KABOOM!  Mortgage time bomb.

If there is any doubt that you should file a Chapter 13 Bankruptcy
before you work our a debt reduction deal with your first mortgage,
this should do it.  File first, work out the modification later,
before that second mortgage gets you.

For more information on these matters, please call our office at 305 548 5020.

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