Can I Modify My Mortgage in a Chapter 13 Bankruptcy?

Filing a Chapter 13 bankruptcy and modifying your mortgage are two different paths to the same end—keeping your house. But they can also work well together. A Chapter 13 bankruptcy can protect your investment by helping you bring a past due mortgage current. Additionally, it can stop a foreclosure and provide you with the time you need to work out a modification with your lender.

Understanding Chapter 13 Bankruptcy

Chapter 13 bankruptcy works by allowing you to catch up on certain payments. You propose a repayment plan, and if the court confirms (approves) it, you'll make monthly payments over the course of three to five years. By contrast, while a Chapter 7 bankruptcy is much quicker—usually wiping out debt in a matter of months—a Chapter 7 case doesn't offer a way for you to keep property that you'd lose after falling behind on a payment.

Applying for a Mortgage Modification

Even though you're paying mortgage arrearages through a Chapter 13 plan, you can still work with your lender to modify your mortgage. It's not at all unusual for a borrower to file a Chapter 13 case to stop a foreclosure and then apply to the mortgage company to modify the terms of the loan.

When you're applying for a modification, you're asking the lender to change the terms of the loan. Your interest rate could be adjusted, and therefore the monthly payment reduced, or your missed payments could be added to the end of your mortgage, thereby increasing its length. When the modification goes into effect, your mortgage will be current.

You'll have to present your modification to the bankruptcy judge for approval. Most judges will approve the plan if the new terms are reasonable. Next, you'll propose a new Chapter 13 payment plan that removes the mortgage arrearages and any other debt included in the new mortgage, like past due property taxes. You'll continue making your new mortgage payment and your new Chapter 13 plan payment until you reach the end of your plan term, after which you will enjoy the benefits of your Chapter 13 discharge.

Is the Bankruptcy Necessary After Modification?

Once you have new mortgage terms in place, your attorney will help you decide whether it makes sense to continue your Chapter 13 case. Because all your debts get included in some way, it will depend on if the Chapter 13 plan addresses issues other than your mortgage. Here are some questions to consider to determine whether there are benefits to managing your debt by staying in the case:

• Do you have a lot of credit card debt that could be discharged (wiped out) in Chapter 13 bankruptcy?
• Do you qualify to get rid of dischargeable debt in a Chapter 7 bankruptcy?
• Do you have income tax debt or support arrearages to consider?
• If you dismiss the case or convert to Chapter 7 bankruptcy, will you have to renegotiate a car loan that you were paying through your plan?
• Are you willing to work with your creditors without the protection of the bankruptcy court?

If you choose to dismiss your Chapter 13 plan, you won't have the protection of the bankruptcy court. You'll be free to work with your creditors on your own, but your creditors will also be free to take whatever collection actions are allowed to them under state and federal law.