Bankruptcy

Question: Can Chapter 13 Debtor Strip Second Mortgage And Then Covert To Chapter 7 To Wipe Out Unsecured Debt?

By Jonathan Alper

Chapter 13 bankruptcy is being used increasingly to modify first and second mortgages on primary residences. Chapter 13 permits debtors to strip off a second mortgage on an upside down property, and a new mortgage mediation program in the Orlando bankruptcy court gives debtors the opportunity to mediate a mortgage modification soon after they file a Chapter 13 bankruptcy. Keep in mind that a Chapter 13 debtor has the option to at any time convert a Chapter 13 to a Chapter 7 liquidation at any time (with minor restrictions).

I received a question by email which I want to address because I suspect other people have the same idea. The question is whether a debtor can with an upside down first mortgage, a second mortgage, and credit card debts can solve all his problems by filing a Chapter 13 bankruptcy, asking immediately for first mortgage mediation, modifying the first mortgage in the mediation, file a motion to strip the second mortgage completely, and then convert the case to a Chapter 7 to wipe out the credit card debts. This plan would be a dream bankruptcy leaving the debtor with a reduced first mortgage payment, no second mortgage, and no credit card debt.

It seems too good to be true, and it is. The problem is that Chapter 13 bankruptcy does not strip a second mortgage unless and until the bankruptcy plan is completed. If a debtor modified his home mortgage in mediation and then converted to a Chapter 7 the second mortgage would remain on the home because the debtor would not have received his Chapter 13 discharge at the end of the Chapter 13 plan. I think a debtor could convert to Chapter 7 after the mortgage modification of the first and/or second mortgage and retain the modified payments because the modification is not part of the bankruptcy proceeding. In other words, this plan may work to modify mortgages and then discharge unsecured debts, but it won?t work to stip a second mortgage in Chapter 13.

Full post as published by Florida Bankruptcy Law on August 18, 2010 (boomark / email).