Debt can sneak up on you, and it’s not uncommon for people to find themselves buried in bills with no real understanding of how they got there. When creditors bombard you with mailings and phone calls demanding payment, it can take over your life and make you feel hopeless. That’s one of the reasons for filing for bankruptcy — immediate relief from the harassment plus a welcome opportunity to start over. However, bankruptcy law is complicated, and one of the first questions that must be decided is what chapter you should file under in order to maximize relief. If the answer is Chapter 13, also called a “wage earner’s plan,” then the issue of loan modifications should enter the conversation.
To ensure you have all the information you need to make the clearest, most informed decisions for your circumstances, consult the Fayette County bankruptcy attorneys at Bunch & Brock. Based in Lexington, we have over 35 years of experience advising people throughout Kentucky about how to best address their situation. If you are burdened with debt, you need the calm competence of a skilled legal team in your corner. Contact us to schedule a consultation. Call 859-254-5522 or fill out this online form.
Filing for a Chapter 13 bankruptcy often works best for people who have temporary financial problems, a steady income, and a willingness to repay some of their debt. Rather than the liquidation offered by Chapter 7, the reorganization approach of Chapter 13 allows debtors to propose a plan outlining what they will do about their debts and presents them the opportunity to save their homes from foreclosure. Chapter 13 gives debtors the power to seek modifications of specific loans without the consent of creditors. For people who want to keep particular collateral such as a car or house, they can modify loans by reducing the total loan balance to the collateral’s current value, reduce the loan’s interest rate to slightly above market rate, and change the length of the loan’s payment plan in order to make payments more affordable.
Of course, these modifications aren’t made in a vacuum. There are minimum legal requirements that must be met before the bankruptcy court will accept the reorganization plan. For one, suggested modifications must take into account the limitation that all loans must be paid in full during the term of the plan, which legally cannot extend more than five years. Another big restriction concerns the ability to modify mortgages. A Chapter 13 plan can propose the modification of secured debts except a debt that is secured only by a security interest in real property that is the debtor’s principal residence. This has been largely interpreted to mean that a mortgage that is not secured at all, such as subsequent mortgages on a property that have devalued below the balance of the first mortgage, are subject to modification. Eliminating unsecured second and third mortgages is also called a “strip-off.”
There are other significant exceptions to the restriction on home mortgage modifications. The restriction does not apply to:
- Rental property, because the loan is not on the debtor’s principal residence
- Mobile homes, because they are not legally considered to be real property
- Home loans that are secured by other real estate or personal property, because the security is not limited to the principal residence
- Liens against the principal residence that the bankruptcy code do not consider to be “security interests,” such as certain nonconsensual liens (tax liens, judgment liens, mechanics liens, etc.)
- Liens for loans that will mature before the end of the reorganization plan.
Chapter 13 and loan modification are not mutually exclusive. Both of their benefits are available to people in need. Modification often works best while debtors are under the protection of the bankruptcy court, because their overall debt-to-income ratio will improve. Any lender at any time can choose to enter into a voluntary modification with a home owner and, possibly, agree to reduce the interest rate. However, modifications in bankruptcy are not optional and, when approved by the court, must be respected by mortgage lenders.
We Can Help
General explanations are useful, but should not be relied upon when determining the rights and obligations of bankruptcy. Each bankruptcy is unique, and it’s important to have an assessment of your situation in order to ensure the best path is followed. For questions regarding the advantages and disadvantages of a Chapter 13 bankruptcy or the effect of loan modification, consult the experienced Lexington, KY bankruptcy lawyers at Bunch & Brock. We have guided many people through the bankruptcy process efficiently and effectively. Let us put our knowledge and experience to work for you to make the best plan for eliminating or repaying your debts. We encourage you to contact our office by calling 859-254-5522 or filling out this online form.
Attorney Matthew Bunch
Matt handles complicated bankruptcies and debt restructuring in Chapters 11 and 13 for both individuals and companies. He has also negotiated with multiple creditors on behalf of his clients to avoid bankruptcy. Matt is the firm’s lead litigator and handles contract disputes, certain personal injury claims and general litigation. [ attorney bio ]
