Eliminating or Modifying Mortgages on Underwater Property
The U.S. Bankruptcy Code generally permits the modification of mortgages with one big exception – 11 U.S.C. § 1322(b)(2) prohibits the modification of mortgages “secured only by a security interest in real property that is the debtor’s principal residence.” In other words, you can’t modify mortgages on your home.
This seemingly broad language, though, is not as conclusive as it may appear. In order to determine your options, several factors must be analyzed.
First, you must determine the value of your property. If you have two mortgages, and the value is less than the outstanding balance of the first mortgage, then the second mortgage may be completely eliminated. In this circumstance, the U.S. Supreme Court has said that the above restriction does not apply because the second mortgage is not actually secured to any equity in the property. It should be noted, though, that in Massachusetts this option is only available in a Chapter 13 bankruptcy.
However, if you only have one mortgage, then you may still have the ability to modify its repayment terms. This may be an option if you fall into any of the following categories:
The underwater property is not your principal residence;
The underwater property is not solely your principal residence (ex. a multi-family property, which serves as both your residence and investment property);
The bank has a security interest in your home as well as some other property (other investment property, bank account, vehicle, etc.); or
The final payment on your mortgage is due within the 5 year term of your Chapter 13 Plan.
If you fall into any of these categories, then you may be able to (1) reduce the balance of the mortgage to the value of the property and/or (2) significantly reduce the interest rate. However, under current law, the entire reduced balance of this mortgage must be repaid through your five year Chapter 13 Plan.
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