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When Can A Mortgage Be Modified Or Eliminated in a New Jersey Bankruptcy Case.

Lawyer In New Jersey Explains When Mortgages Can Be Modified In Bankruptcy Case

The bankruptcy code section permitting a mortgage modification in a chapter 13 is as follows:

11 U.S.C. Section 1322 (b)(2)

“…modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;”

The bankruptcy laws permit a mortgage modification in a 13, under certain circumstance. The interpretation of  section 1322 (b)(2) is different when dealing with real estate that is not the debtor’s principal residence. A mortgage in connection with a non principal residence may be modified and reduced to the value of the real property. The following example explains this application. A debtor has a rental home and resides in a separate property. The value of the rental home is $100,000. The payoff of the first and second mortgage is $80,000.00 and $60,000.00, respectively.  The first mortgage may not be modified under any scenario because the house’s value is more than the first mortgage’s payoff amount. However, the bankruptcy code permits the reduction of the second mortgage to $40,000.00, which is the amount available after the first and second mortgage payoff is subtracted from the house’s value. In this scenario, the $40,000.00 must be paid through the bankruptcy plan. If the previous example related to the debtor’s principal residence, and not a rental property, the bankruptcy law would not permit any modification of the second mortgage.

The bankruptcy law permitting a mortgage modification in a chapter 13, specifically excludes the modification of any mortgage that is deemed a secured claim, in which the mortgage is limited to a security interest only in the debtor’s principal residence. The judicial case law interpreting this bankruptcy law, determined that any mortgage that attaches to any equity in the debtor’s principal residence may not be modified. This means that if any value of any principal residence is less than the payoff of the first mortgage payoff, than all junior mortgages may be completely stripped and removed from the real estate. However, if the value of the debtor’s principal residence is more than the first mortgage payoff amount, even by $1.00, than no junior mortgage may be modified, to any extent.

An example of the law’s application to a principal residence is as follows. A house with a value of $100,000.00 and a first mortgage payoff of $101,00.00, permits the debtor to strip away, completely, any junior mortgage from the house, no matter the amount of the junior mortgage payoff. However, if their is any equity available in the principal residence after subtracting the payoff of the prior mortgage, than the second mortgage may not be reduced, to any extent. For example, if the value of a principal residence is $100,000.00 and first mortgage’s payoff is $99,990.00, than the second mortgage may not be modified, to any extend. However, if the debtor’s principal residence has a $100,000.00 value and the first mortgage has a payoff of $101,000.00, than the second mortgage may be completely stripped from the house. In other words, when dealing with a mortgage modification in connection with a principal residence, it is all or nothing.

Typically, the main issue regarding such cases is the house’s value. If the mortgage company contests the value, than the debtor and mortgage company must provide an expert real estate appraisal. Please note that there are exceptions to the above law that is not explained above. Also, in certain circumstances, the debtor may be required to pay a portion or all of the part of the mortgage balance that may be “eliminated” as explained above.


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