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You Can Modify a Mortgage on a Your Home in a Chapter 13 Bankruptcy!

By Peter Orville, Attorney at Law

You can modify (or cramdown) a mortgage on your residence in a Chapter 13 under current bankruptcy law if certain conditions are met.  While the general rule is that you cannot modify mortgages on your home in a Chapter 13, you can if either of two separate instances exist. 

     *1. If there is more than one mortgage on your home and the first is owed more than the value of the property.  In this case the second, third, or fourth, mortgages can be avoided and treated as any other unsecured debt.

     *2. If the mortgage is also secured by any real or personal property other than your residence, you can cram it down (modify) to the value of the home and treat the balance as an unsecured debt.

There has been much coverage in recent months about Congress’s attempts to extend the ability of homeowners to get a meaningful mortgage modification in a Chapter 13 the same way family farmers can in a Chapter 12 farm bankruptcy.  Bankruptcy Law Network has discussed the politics behind these attempts and some of the forces trying to block them. 

Most of the previous discussions, however, have not identified the two circumstances listed above which currently allow mortgage modifications within a Chapter 13 case.

A study of cases that look at the issues that arise when a mortgage is also secured by property other than the personal residence are not applied uniformly by bankruptcy courts.  Some courts find that if a personal residence is also used for some other purpose – such as living on one side of a duplex and renting the other side out – then the mortgage can be modified.  Other courts say the opposite.

The Western District of New York is a good example of the lack of uniformity.  There are three separate decisions by three different bankruptcy court judges on this issue with different results.

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Full post as published by Bankruptcy Law Network on September 27, 2010 (boomark / email).