Chapter 13 Bankruptcy Plan May Permit Modification of Mortgage on Under- Secured Rental Property

Question: How can I deal with a rental property which is under-secured (value is less than the mortgage(s)) and for which I am not receiving sufficient rent and income to cover the mortgage and monthly expenses?

One potential option in a Chapter 13 Bankruptcy (if one qualifies) is to propose a modification of the mortgage obligation. Although there are significant limitations in the bankruptcy code, the law does currently allow a debtor(s) to propose to modify a secured claim of a mortgage company on property which is not the principal residence. An example, Client owns a rental property which they purchased in 2006 for $250,000 and took a mortgage of $225,000 requiring monthly payments of $2,000 per month (assuming a 30 year fixed rate mortgage at 6.5% with principal and interest payments of $1,422.15, and a monthly escrow of $577.85 for annual taxes and insurance). They are receiving $2000/month in rent. However, with the changes in the real estate market, the property is now worth only $190,000. Due to a period in which the property was vacant for 3 months, Client fell behind in payments and is facing a possible foreclosure. By filing a Chapter 13 Bankruptcy, Client may be able to save the property and better their chances of addressing the shortfall on both the monthly payment and the problem of the lack of equity. Chapter 13 might allow Client to propose a Plan in which they reduce the loan amount to the value of the property. This may allow Client two (2) benefits. First, they may be able to reduce their monthly expense by $200/month to address the administrative expense of the landlord (i.e. eviction costs, legal fees, permits, cleanup, maintenance, etc.). Second, if they effectively reduce the total loan balance, their monthly payments would give them a chance, depending on the value of the property in the future, to sell the property and payoff the loan without requiring additional funds.

The provisions of Chapter 7, 11, 13 of the Bankruptcy Code and Chapter 7 may also provide other options . However, the bankruptcy law is complicated and the results which any person may be able to obtain are based on the specific circumstances of their case. We strongly recommend that anyone considering bankruptcy consult and retain an attorney.

Please Note: A Chapter 13 Bankruptcy Plan Mortgage modification can not be used to modify a mortgage which is secured by the principal residence of the Debtor. The United State Senate has defeated the Helping Families Save Their Homes Act (S. 896) by a vote of 45 to 51 which would have permitted mortgages secured by the debtors principal residence.

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