Congress continues to ponder a change to the bankruptcy code that would allow bankruptcy Judges to treat mortgages the way that car loans (older than 2.5 years) are currently treated in a chapter 13 bankruptcy.
If you have read some other entries on this blog, you understand that in Chapter 13, a plan is proposed that allows you to make a payment toward your unsecured debt that you theoretically can afford on a monthly basis.
The remainder of the debt is then discharged or wiped away. Many chapter 13 filers end up paying a small fraction of the overall unsecured debt as a result.
In that same chapter 13 proposal, 2.5. year old automobile secured claims are “stripped down” or “bifurcated” into two debts, one secured, one unsecured. The secured loan is crammed down to the value of the collateral, and the rest is transformed into an unsecured debt and treated as stated above.
First Mortgages are not treated this way. Second mortgages if wholly unsecured may stripped away and treated as an unsecured debt.
Now, if a home is worth $250,000.00 and the first mortgage amount is $350,000.00, the bankruptcy filer must continue to service the full $350,000.00 mortgage in installments just as they were prior to the bankruptcy in order to keep the property.
The change to the bankruptcy code that Congress is considering. would possibly treat this first mortgage somewhat like the 2.5 year old car loan.
Of course nothing is as simple as it seems.
It is likely that the change will contain roadblocks that will prevent many chapter 13 bankruptcy filers with upside down homes, to take advantage of it.
The bill may have unintended consequences as well. It could cause the cost of mortgage loans to rise for everyone else. This is an ongoing and interesting debate.
A fairly recent article about the amendment can be found here.
For Arizonans, who are upside down in their primary residence and who are also otherwise bankruptcy candidates, you can’t do it now, but you may be able to in the near future. Keep an eye on the legislation.