Can I Reduce My Mortgage in Bankruptcy?

Some people think that a homeowner's primary mortgage can be reduced in bankruptcy. This is a myth. The reality is that with one rare exception, bankruptcy law does not allow you to modify or reduce your primary mortgage on a home that is your principal residence.

However, in Chapter 13 bankruptcy you may be able to get rid of mortgages other than your primary mortgage in certain circumstances. And you may be able to reduce your primary mortgage on non-residential real estate. (To learn more, see the articles in Chapter 13 Bankruptcy and in Your Home in Bankruptcy.)

The Exception: The Loan is Secured by Property in Addition to Your Home

You may be able to reduce the amount you owe on your primary home mortgage in Chapter 13 bankruptcy if the loan is secured by property in addition to your home. Examples of these types of loans include:

•  a loan secured by more than one property (that is, you pledge your residence and another non-residential property as security for the loan), or
•  a loan that is secured by both your home and a motor vehicle.

In practice, these types of loans are very rare. Most lenders are aware of the consequences of requiring more security in addition to a principal residence, and avoid them.

Stripping Off Second Mortgages or HELOCs

In Chapter 13 bankruptcy, you may be able to reduce or “strip off” second mortgages and home equity lines of credit (HELOCs) if your equity is so low that if the property were sold, there would be no money available to pay any amount of the second mortgage or HELOC. In such a case, the court may remove the mortgage and treat the loan amount as an unsecured claim which will be paid off (probably in pennies on the dollar) through your Chapter 13 plan.

To learn more about stripping off junior liens in Chapter 13 bankruptcy see, Your Home in Bankruptcy.

Cramming Down Loans on Non-Residential Properties

If you have a mortgage on property that is not your residence, you may be able to cram down (or reduce) the amount of the loan to the value of the property.

To learn more about cramdowns, see Cramdowns in Chapter 13 Bankruptcy.