The skinny on 2 mortgages in bankruptcy

2 min read

Dear Bankruptcy Adviser,
My wife would like to file Chapter 13, and most of the credit card debts under her name (are) over $40,000. We have a house under our name and are waiting for a loan modification for our first mortgage.

Can I get some guidance on what we should do first? We have no savings and would like to keep the house. Should we wait for the loan modification decision or should we also include the mortgage in the Chapter 13?
— Ed

Dear Ed,
You ought to explore a couple of options prior to filing the Chapter 13. Although you can file bankruptcy without an attorney, Chapter 13s are very complicated, and it is very rare that these cases are ever confirmed, which means the judge accepts your case, called “the plan.”

Here are four points to consider that can help answer your question:

1. Is the value of your property less than the balance on your first mortgage?

Many people are “upside down” on their primary residence, meaning the value of their house is worth less than the balance of the two mortgages. Quite often, the value of the house is worth less than the balance of the first mortgage loan itself.

If the value of the property is worth less than the balance owed on the first mortgage, then you could keep your house and eliminate the second mortgage entirely. The second is eliminated after completing your three- to five-year Chapter 13 plan, when the case is discharged. You cannot eliminate the second mortgage and keep the house in a Chapter 7.

2. Is the lender cooperative?

If the lender is working with you now, then it is more than likely that it will work with you while inside the Chapter 13 proceeding. While this is a touchy subject because you might not want to alert the lender of your pending bankruptcy, I have clients who have or are modifying their loans while inside a confirmed Chapter 13 case.

3. Will you qualify for a Chapter 7 bankruptcy without the mortgage payments?

This is an important issue to consider before walking away from your home. Most people want to file for bankruptcy and eliminate all the debt and do not want to pay back anything. This is not always possible because your income might be too high for a Chapter 7 filing, or a “fresh-start” bankruptcy.

You could actually be compelled by the bankruptcy laws to keep your house, because it is more worthwhile to pay the mortgage and a Chapter 13 plan payment rather than lose the house and still have to make a Chapter 13 plan payment.

4. Is your first mortgage an adjustable- or fixed-rate loan?

It is possible to modify your mortgage payment while in bankruptcy; however, each lender and every situation is unique. Therefore, before filing a Chapter 13 bankruptcy with the hopes of keeping your home, be aware of whether the mortgage interest rate will adjust during the course of the bankruptcy. An interest-rate adjustment could make it impossible to keep paying the mortgage.

If you have an adjustable-rate mortgage and you file a Chapter 13 bankruptcy, you must immediately try to work with the lender to modify the loan.

Your question is an important one, Ed. But you are still going to face some difficult decisions. I suggest that you wait for an answer on the loan modification and decide whether you can afford that new payment. You will have time to explore bankruptcy after you have a final answer from the lender.

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