Saving Your Home or Investment Real Estate in Chapter 13

Much of my practice today consists of consulting with clients who are interested in saving their real estate from foreclosure using Chapter 13 of the Bankruptcy Code. The discussions breakdown into two different categories - real estate that is used as a principal residence and real estate that is not used as a principal residence.

The typical principal residence in South Florida today has two mortgages -- what they used to called 80-20 mortgages. That is, two mortgages with the first mortgage in a amount of 80% of the value of the home and the second in an amount of 20% of the value of the home. As most real estate values in South Florida have dramatically declined, the homeowner is "upside-down" or "underwater." For example, $400,000 is owed on the first mortgage and $100,000 owed on the second mortgage and the real estate is now valued at $375,000. Upon the filing of the appropriate motions in Chapter 13, the Bankruptcy Court may hold that the second mortgage is wholly unsecured by property and therefore is an "unsecured claim" and its mortgage lien "avoided". An order is obtained from the Bankruptcy Court and recorded in the county public records to evidence that the mortgage lien has been avoided. It should be noted, that as to a principal residence, the second mortgage must generally be wholly unsecured in order to be avoidable. That is, there cannot be even one dollar of collateral value to secure its claim. But is it possible that the holder of the second mortgage might reduce its mortgage by agreement due to today's market conditions. In chapter 13, the first mortgage on a principal residence is generally not modifiable, although a homeowner is free to try to reach a voluntary modification with the mortgage company.

The rules are different as to non-principal residential real estate property or investment real estate. As with principal residential property, second mortgages can be wholly avoided. But in addition to being wholly avoided, second mortgage on non-principal residential property can be partially avoided or "stripped down". Usually though in today's market there is no difficulty in wholly avoiding a second mortgage. Although most first mortgages on principal residential real estate cannot be modified in Chapter 13, first mortgage on non-principal residential real estate may be modified. For example, take an investment property valued at $100,000 with a $150,000 first mortgage and $50,000 second mortgage. The second mortgage would be held as wholly unsecured and avoided. The first mortgage could be avoided to the extent the first mortgage exceeds the value of the property in the amount of $50,000. The question would then be how the remaining $100,000 first mortgage would be paid off. There are a few alternatives under the Bankruptcy Code and there are further alternatives that may be reached by agreement with the mortgage holder. The mortgage holder may be especially amenable to an agreement in today's market. One alternative may be to pay interest only on the $100,000 - for say four years - with the property to be sold or refinanced before the four years is over. Another would be to reamortize the the $100,000 secured claim mortgage at a new interest rate over fifteen to thirty years.

We are in a unique situation in South Florida today and the case law and procedures for addressing mortgages in Chapter 13 is dynamic, especially as to non-principal residential mortgages.