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Mortgage Modification and Chapter 13 Bankruptcy – Do Them in Sequence – Not Simultaneously

Despite the recent revelations regarding the mortgage foreclosure process, I am finding that more and more local homeowners are beginning to make headway in the mortgage modification process. Unfortunately, in many cases, this proves to solve only half the problem.

Many homeowners I encounter in my practice are not only facing difficulties with their first mortgage, but may also be dealing with a second mortgage obligation as well as credit card obligations. While in many instances, the second mortgage and credit card debt can be dealt with in a Chapter 13 bankruptcy, including the possible striping/cramming down of the second mortgage, it is a prudent move to make your best effort to enter into a trial modification payment arrangement before filing Chapter 13 bankruptcy.

In a Chapter 13 bankruptcy in which you are not repaying your creditors in full, you are required to devote all of your net disposable income to your Chapter 13 plan. While the initial payment to the trustee under your plan is determined by the means test and your current income and expense, your payment could increase substantially during the life of your plan if you modify your mortgage while in a Chapter 13 plan. For example, let’s say that your present mortgage payment is $2500.00 per month and your plan payment is $300.00 per month. Six months into your case, you are successful in modifying your mortgage, and you have reduced your mortgage payment from $2500.00 to $2000.00 per month. The euphoria of this reduction will quickly wear off as the trustee will most likely demand that your plan payment increase by a comparable amount since you now technically have “additional disposable income”. In this case, you could now be looking at a plan payment of $800.00 per month.

The best way to avoid this situation is to try to enter into a trial modification agreement before you file for Chapter 13 bankruptcy. Although your mortgage payment will have decreased prior to your filing, you will be able better project your disposable income and propose a more reasonable plan payment as opposed to losing all of the benefit you have just gained in modifying your first mortgage.