Bankruptcy Questions Answered

Debtors Want To Amend Confirmed Chapter 13 Plan To Add Strip Of Second Mortgage

Clients, husband and wife, filed Chapter 13 bankruptcy in 2007. This couple filed bankruptcy to save their home which is subject to a first and a second mortgage. The bankruptcy court approved a five year bankruptcy plan, and clients are current on their plan payments. The couple also has a large second mortgage. Chapter 13 bankruptcy can "strip" a second mortgage if and when the home is worth less than the first mortgage balance. This couple did not qualify to stip their second mortgage because when they filed their Chapter 13 their home was worth in excess of their first mortgage balance.

Now, after years of declining home values, the couple called my office to report that their home value is less than their first mortgage balance. They asked if they can modify their Chapter 13 plan to strip their second mortgage under the changed circumstances.

This is the first time I’ve been asked this question. I suspect that many Chapter 13 debtors are in similar situations. I do not think the debtors easily can change their existing plan to strip the mortgage. I think that the debtors would have to file a petition with the bankruptcy court to revoke their plan confirmation if they want to re-do their plan to treat their second mortgage as an unsecured debt. I suspect the Chapter 13 Trustee would not support the debtor’s petition.

Another option would be for the debtors to voluntarily dismiss their Chapter 13 case. If the debtors are current on their plan payments, and they are, the court likely will not prohibit refiling a new case. In the new Chapter 13 filing the debtors could seek to strip their second mortgage. Debtors would incur the expense of a completely new case and would start a Chapter 13 plan payment schedule from the beginning.