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Mortgages are a form of secured debt. In other words, your lender has the contractual right to take your home through foreclosure without having to file a lawsuit and obtain a judgment against you (which is what unsecured creditors must do).
Negotiating with mortgage lenders, therefore, is difficult. Foreclosure is a costly procedure, but lenders always have this option if borrowers fail to make payments. With help from an experienced attorney, however, you may be able to achieve a modification of your mortgage that fits your budget and financial goals.
This relief may be even easier to achieve when you file Chapter 13 bankruptcy. Chapter 13 and mortgage modification are two different methods of preventing foreclosure, but many don’t realize they can be used simultaneously.
When you file Chapter 13 bankruptcy, your creditors must stop all collection activities because of the automatic stay issued by the court. As a result, you are safe from a foreclosure proceeding for the duration of your case (3-5 years). Many people use this period to catch up on mortgage arrears so that, by the time the case ends, foreclosure will no longer be a threat.
But few realize they can take it a step further and negotiate with their lender during their case. The lender may approve a lower interest rate, which will lower the monthly payment. The lender might also move the arrears to the end of the mortgage, which extends the terms.
While you must submit your modification proposal to the bankruptcy court, the judge will approve it so long as the terms are fair. You will then need to submit a new Chapter 13 repayment plan that no longer includes the delinquent payments and related debt.
A cramdown is a debt restructuring decision that the court issues despite objections from creditors. It typically refers to the reduction of a debtor’s principal down to the fair market value of the property. The court then discharges the difference along with unsecured debt.
Unfortunately, a cramdown will not possible on the mortgage for your primary residence. Furthermore, you must pay off the newly reduced amount by the end of your Chapter 13 plan, which is typically unfeasible for most bankruptcy filers.
In general, you will be more likely to modify your mortgage through lender negotiations during your Chapter 13 case (with help from a seasoned attorney).
Are you facing the threat of foreclosure? Although it may feel as though you’ve been backed into a corner, you likely have more options than you realize, and our job is to help you select the most appropriate option for your situation. Our services at the Bach Law Offices, Inc. are backed by decades of focused experience, which enables us to pair highly effective legal strategies with our clients’ unique financial challenges.