Chapter 13 cases are very powerful at stopping foreclosure or forcing payments. Yet, Chapter 13 bankruptcy cases cannot modify mortgages. It has been proposed many times in Congress or in legal circles that Chapter 13’s should be able to alter mortgage terms. No changes to the bankruptcy code have been made for this purpose. Explaining what Chapter 13’s can and cannot do with mortgages will help clarify what is actually available in a Chapter 13 case.
Chapter 13’s are powerful because they can always stop foreclosure and even sheriff sales. If you are filing your first Chapter 13 case, you can almost always stop your foreclosure or sheriff sale. This is almost a “given.” It is a near 100%, “bullet-proof” way of stopping the foreclosure process.
Chapter 13 also provides a built-in mechanism for curing arrears (behind amounts that you owe to the mortgage). Chapter 13 also forces the mortgage company to take ongoing payments usually through paying these amounts to the Chapter 13 trustee. This is a wonderful system because it works every time. It also is very predictable because the same thing happens every time.
Chapter 13’s cannot “modify” mortgages generally in any way. This means that the terms, the monthly payment, and any amount behind are generally non-negotiable and non-alterable in Chapter 13. Because there are no provisions in the bankruptcy code (and case law) for forcefully modifying a mortgage through bankruptcy, the mortgage company generally expects everything to stay exactly the same. The mortgage company expects to receive full payment for their arrears amount and any monthly ongoing payment. This expectation is so strong and well known that it is virtually impossible for anything else to happen through a Chapter 13 plan even if the creditor is willing to agree otherwise.
Therefore, even though Chapter 13 is very powerful, sometimes getting a loan modification can be a more affordable option if it becomes available. Some mortgage holders will file a Chapter 13 case to stop a sheriff sale or foreclosure only to later negotiate a loan modification. By paying the mortgage for 6-18 months through the Chapter 13 plan, it can prove that debtor can afford loan modification payments. It may actually be in the mortgage holder and the debtor’s best interest to make a loan modification agreement. Eventually, Chapter 13 can even be dismissed in such cases. Sometimes a loan modification can be a much more stable, long-term solution than the Chapter 13 case. This is especially true if the Chapter 13 payment is excessively high due to the amount of the arrears or current monthly required mortgage payment.
Because Chapter 13’s cannot modify mortgages, many battles never occur in the Chapter 13 case. If the loans could be modified, it would be normal to expect opposition and heavy negotiation in bankruptcy. Not having to deal with these battles does have an advantage. It makes Chapter 13 very predictable and reliable. The powers of Chapter 13 are then loaded and ready to save any mortgage situation.