Mortgages in Chapter 13

Chapter 13 Bankruptcy And Mortgage Debts

Homestead Property Mortgages. Chapter 13′s treatment of mortgages depends upon whether or not the mortgage is on the debtor’s principal residence or the mortgage is recorded against an investment property. Chapter 13 will not change the amount owed, interest rate, or other terms of your first mortgage on your homestead. Specifically, if your homestead is worth less than the amount of the first mortgage (“upside down” or “underwater”) the Chapter 13 will not lower your first mortgage balance to the house’s current fair market value.

The Middle District – Orlando Division has implemented a plan for mortgage modification mediation under HAMP and other programs. The mediation fee is $385 and is payable to the Trustee at the time the Motion for Mortgage Modification Mediation is filed. The Mortgage Modification Mediation process is complex and requires a debtor to submit the same information required under the HAMP guidelines.

If you have already started the mortgage modification process (prior to filing), the government’s HAMP Directives protect bankruptcy debtors. Chapter 13 bankruptcy does not diminish your rights to a HAMP mortgage modification. Borrowers in active Chapter 13 bankruptcy cases must be considered equally for HAMP modification upon request. Borrowers in the midst of a trial modification cannot be denied permanent modification because they file bankruptcy. Payments made to the Chapter 13 trustee count as timely mortgage payments during your trial modification period.

Even if your first mortgage is not modified in a Chapter 13 bankruptcy the bankruptcy filing can help you save a home from foreclosure. Filing a Chapter 13 will stay any foreclosure proceedings. In addition, a debtor who is past due on mortgage payments, insurance, and taxes can use a Chapter 13 to catch up past due payments so that the mortgage becomes current. Mortgage arrearage at the time of filing can be paid without interest in periodic payments during the Chapter 13 plan.

There is an additional benefit in Chapter 13 for people with second mortgages on their primary residence. If your house has a second mortgage, and the house is upside down as to the first mortgage as shown in an appraisal prepared by a Florida Certified Appraiser, you may be able to strip off the second mortgage (making it an unsecured debt). After you complete your Chapter 13 plan, the bankruptcy discharge will remove the second mortgage as a lien against the house. Understand that you must complete your Chapter 13 plan and obtain a bankruptcy discharge to complete the second mortgage strip.

A recent federal appellate court decision issued in May, 2012, held that debtors may also strip a wholly unsecured second mortgage in a Chapter 7 bankruptcy. Some debtors currently in a Chapter 13 primarily because they want to strip an unsecured second mortgage may want to convert to Chapter 7 because they would then not have to complete their Chapter 13 plan payments to remove their mortgage.

Non-Homestead Property Mortgages. As stated above, Chapter 13 does not force a reduction in your first mortgage on your primary residence. However, you may be able to reduce the first mortgage balance on non-homestead property to the property’s current appraised value (“cram down”). This is a somewhat complicated process that requires appraisal of the property by a state certified appraiser and the ability to pay 100 percent of the crammed down mortgage during your Chapter 13 Plan (usually with a balloon payment obtained through sale or refinance of the property).

Jon Alper

About Jon Alper

Jon is an attorney focusing on bankruptcy and asset protection in Orlando, Florida.