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Changing Your Mortgage in Bankruptcy

Well, the bad news folks is that right now you cannot modify your mortgage in bankruptcy except in the very rare case where you have a mortgage that has NO, $0, NONE of the equity of the house securing it. What this means is that you have to pay the mortgage back unless the house value is no more than all the mortgages and liens ahead of the mortgage you are trying to modify. Even then, all you can do is strip the mortgage from the house and discharge it in a chapter 7 or pay it as an unsecured debt in a chapter 13. You can do the same things if the mortagage holder took other items in addition to the home as collateral, such as a car or something like that. None of these usually help the person who is having trouble with his first mortgage.

The new bankruptcy proposals  before Congress may change that but it is too early to tell. The Senate version, S. 2136, is to be considered by the Senate Judiciary Committee in January or February, 2008. Write your senator if you want help from this law.

The House Judiciary Committee passed its version, H.R. 3609, on December 12, 2007. It is called The Emergency Home Ownership and Mortgage Equity Protection Act. The House is expected to vote on this early in 2008. Write your congressman if you want to benefit from this Act. 

H.R. 3609 allows a bankruptcy judge to modify, or change, a debtor’s mortgage in a chapter 13 bankruptcy. However, it has restrictions:

-it covers existing loans only and only loans made after 1/1/00.

-it covers nontraditional loans and subprime loans only.

-it applies only where there’s a notice of foreclosure.

-it sunsets (this means it no longer exists) after 7 years.

-it has guidelines for judges so that they will not cramdown the value of a house below fair market value or reduce the interest rate below conventional mortgage rate.