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You Cannot Modify a Primary Mortgage in Chapter 13 Bankruptcy… Except When You Can.

I have said it here before, and I will say it again. You cannot bifurcate and cram down an under-secured primary mortgage when your primary residence is named as the securing property.

Loan Modification in Chapter 13 Bankruptcy

Let me take a step back. Chapter 13 bankruptcy allows for the modification of liens secured by property other than the debtor’s primary residence. Specifically, see 11 U.S.C. §§ 1322(b)(2) below:

Subsection (b)(2) permits a plan to “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims”

In most cases, the modification of such secured claims involves reducing the amount owed to fair market value of the securing property or reducing the accrued interest rate to current economic standards. Again, much to the dismay of Arizona home-owners, this modification cannot be applied to the primary lien on a principle residence.

A recent chapter 13 bankruptcy case in Arizona confirmed a notable exception to the above standard. In this case, a creditor holding two short term loans consecutively secured by the debtor’s primary residence filed proof of claims in excess of $700,000.

The value of the securing property was estimated at less than $40,000, and the debtor proposed to pay as much to the secured creditor through the plan. As you can imagine, the creditor objected to this treatment based upon the above mentioned code.

Ultimately, the bankruptcy court ruled in favor of the debtor, according to another section of the bankruptcy code that I have withheld from you thus far. Section 1322(c)(2) of the code, included below, permits modification of a claim secured by a principal in cases where the obligation matures and becomes due in full before or during the Chapter 13 plan term.

In a case in which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor’s principal residence is due before the date on which the final payment under the plan is due, the plan may provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title.

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