My mortgage is upside down, how can bankruptcy help?

Current bankruptcy law allows a debtor to "cram down" the principle on a mortgage to fair market value. However this is limited to investment properties. This rule cannot be applied to your primary residence, or "homestead". Chapter 13 has a mortgage cram down (lien stripping) provision. Specifically, 11 USC 1322 states that someone filing a Chapter 13 bankruptcy plan may 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.

Although not expressly stated, this section has been interpreted by many judges to mean that a mortgage cannot be modified if it is secured by the debtor's principal residence. Despite the general rule, exceptions may apply so as to allow lien stripping of a mortgage on a personal residence: loans based on a home plus other collateral. Lien stripping is prevented only when the lien is secured “solely” by a personal residence.

Court decisions have made it clear that when the debtor has given other collateral (in addition to the personal residence; e.g., office equipment) as security for the mortgage, lien stripping will be allowed.  In a cram down, the bankruptcy court splits the outstanding mortgage balance into two parts. The amount of debt equal to the current appraised value of the security is treated as a secured claim, which the debtor must continue to pay. The amount of debt in excess of the current property's value becomes an unsecured claim, which is usually not repaid in full.

Talk to a Bankruptcy Lawyer about your situation to find out if you may be able to strip off am unsecured portion of your mortgage or otherwise get the loan modified though a bankruptcy proceeding.