subject: Can Bankruptcy Modify A Mortgage? [print this page] Generally, the answer is noGenerally, the answer is no. But, there are situations where a bankruptcy can modify a mortgage. Consumers today are mostly unsuccessful in getting meaningful modification of their mortgages through government programs and voluntary cooperation by their mortgage companies. Bankruptcy sometimes works where all else fails.
Using bankruptcy, a mortgage can be modified if it has no equity securing it. Let me give you an example. Suppose that you have a house worth $100,000. Your first mortgage has a payoff of $110 and you have a second mortgage of $20,000. In this example, the second mortgage is completely and totally unsecured. Ineed, the first mortgage is partially unsecured. This is a situation where bankruptcy can help.
In what is called a mortgage strip off, a homeowner can file a Chapter 13 plan which provides that the second mortgage shall be treated like a credit card debt. Unsecured debts, for example, credit cards and medical bills are not paid any interest and frequently only paid a fraction of what is owed in a Chapter 13 bankruptcy. This is done every day.
Normally, residential mortgages cannot be modified in bankruptcy. The only exception to this rule is when the mortgage is completely unsecured, like our example above. The second mortgage does not completely go away, however it is treated like a credit card and paid, normally, a few pennies on the dollar in the bankruptcy plan. At the termination of the chapter 13 plan the mortgage is removed.
Now, in our example, the homeowner still has a home that is worth less than what is owed on it. However, the homeowner has made a significant gain in his overall financial status by the elimination of the second mortgage.
You should observe that this rule can and does vary from state to state, however it is the general rule across the country. In Cincinnati Ohio and Dayton Ohio there are lots of consumers who cannot obtain a meaningful mortgage modification from their mortgage creditors. In approximately 20% of all cases, however, we are able to strip off the second mortgage in a Chapter 13 bankruptcy. That is better, in some cases, than a modification.
If you think that you are going to lose your home because you can no longer afford the payments, and if you have a second mortgage, check to see if your second mortgage is totally unsecured. If it is totally unsecured, you might have an opportunity to eliminate it with a Chapter 13 bankruptcy.
