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Can I refinance my mortgage or enter a mortgage modification while I am in a Chapter 13 bankruptcy?

  • By: Christopher Benson
  • Published: September 4, 2014

The first thing you need to know is that the bankruptcy Court does not provide a law to force the modification of a residential home loan…i.e. force a lender to modify you home loan.  In the commercial setting and in Chapter 11 cases, there are laws that provide for such a modification; however, in the consumer, residential setting, there is not.

That being said, a Chapter 13 can be valuable to the process of getting a loan modification or refinance done because your lender is involved in the bankruptcy process and will have a lawyer working on your file. So, you have the lender’s attention instead of dealing with a series of customer representatives.

Also, probably the biggest benefit is that if the value of the collateral (the house) is less than the amount owed on the 1st mortgage, you can strip off the 2nd mortgage and make that claim unsecured like a credit card.

The mortgage crisis has come full circle. Early on, many lenders were rejecting any form of loan modification, electing instead to foreclose and move on. But now with a massive amount of write-offs and a glut of foreclosures cooling the housing market, lenders are more eager than ever to help families stay in their home.

Chapter 13 bankruptcy is an especially hospitable form of bankruptcy for underwater homeowners, because it’s the only form of bankruptcy that allows you to strip off a second mortgage while keeping your home. When you fill out your Statement of Intent, you will be asked what you want to do with each secured debt that you owe. Do you want to pay it off? Surrender the property? Reaffirm the terms of the loan? There is also an “other” option, where you can indicate that you’d like to attempt to modify the loan and keep paying on it.

Some lenders may require court approval of the loan modification, which will involve your attorney filing a motion asking the judge to approve it. However, while your bankruptcy case is active, you will likely have to take whatever money you are now saving on the lower mortgage payment, and apply those funds to the payment plan for the other creditors. But after the payment plan is concluded, you will have a nice, low mortgage payment that should be more than affordable.

Over the past 27 years, the Law Offices of Christopher A. Benson has helped over 2,300 of Washington clients take control of their financial situation. We can stop your garnishment and change your monthly payments for all your combined unsecured debt, and if you have had more than $600 garnished within the last 90 days, we can get all of the money back in most cases. But you have to act quickly–call (253) 815-6940 for your free consultation, or email us today. Evening and weekend appointments available.

Christopher Benson

About the Author Chris served on the Board of Directors for Habitat for Humanity
Seattle/S. King County for 10 years and served as Vice President
of the organization during part of that time. Read More