QUESTION: CAN A RESIDENTIAL MORTGAGE BE RESTRUCTURED BY A BANKRUPTCY?
ANSWER: Yes and no, depending on what restructuring you want.
A Chapter 7 bankruptcy is not going to change, restructure, or resolve unpaid mortgage payments. This type of bankruptcy is geared more towards handling unsecured debts, meaning those debts that do not have an asset (such as a home, car, boat) held as collateral. If you are behind on payments on a secured debt, even with a Chapter 7 bankruptcy filed, you could lose your assets to foreclosure or repossession. If keeping your home is vital, you should consider a Chapter 13 bankruptcy.
In a Chapter 13, you can pay off the arrears on the first mortgage over a period of 5 years, but you will have to make any future mortgage payments as they become due. For example, if you owe $10,000 in back payments, and the monthly payments are $1,000, and you file a Chapter 13 on June 15, then you can pay the $10,000 over a period of 5 years, but the next monthly payment of $1,000 must be paid on July 1. You must stay current on your payments from that point forward.
Additionally, if you have a second or third mortgage that is totally unsecured, you can “strip” it in a Chapter 13, meaning paying it off at pennies on the dollar. In order for a second or third mortgage to be considered unsecured, the value of the home must have dropped to a value below the amount currently owed on the first mortgage.
At the current time, you cannot force a mortgage company to modify your home loan with bankruptcy. An interesting development in bankruptcy has been on the table since home prices have been dropping. There have been proposals that would allow Bankruptcy judges the power to force a mortgage lender to modify the terms of the loan, e.g. reduce the interest rate and/or reduce the principal. No laws have been passed on this yet. Whether judges would use such power liberally or stringently is anyone’s guess. This debate seems to have cooled down lately. I will post a future blog if this law should go into affect, so stay tuned.
Download our free checklist on what debts are dischargeable in a Chapter 7 bankruptcy.