How a Mortgage Modification Can Stymie a 'Chapter 20' Bankruptcy | Haines & Krieger

One of the more powerful options for those considering filing Las Vegas bankruptcy is referred to as “chapter 20” bankruptcy. Although there is no actual chapter 20 for debtors to file in, it’s really successive bankruptcy filings, first a chapter 7 and then a chapter 13, adding up to 20. The purpose of a chapter 20 bankruptcy is to discharge a second, underwater mortgage and then strip the lien after a chapter 13 repayment plan. Obviously, homeowners have to be seriously underwater for a chapter 20 to work or be worthwhile, but for some it is, though it has its drawbacks. For example, modifying the primary mortgage can stymie a chapter 20 bankruptcy. Here’s how.

If the modification goes through before the chapter 7 bankruptcy, then debtors can be in trouble. Specifically, when banks generously offer principal write-downs, then debtors suddenly have equity in their homes. This is usually heralded as a victory for debtors because now they can sell the home without dealing with a mortgage deficiency.

The catch, though, is that the second mortgage might suddenly have value, making it secured instead of unsecured debt. This means that after a chapter 13 bankruptcy the lien can’t be stripped off it. The result is that the debtor has wasted a lot of time, money, and effort trying to get out from under a second mortgage for nothing.

There are a few ways to prevent this. Primarily, see an experienced Las Vegas bankruptcy lawyer promptly when you’re underwater on your mortgage. Owing more money than your house is worth is a fiscal crisis because you will have lost all your equity and will probably need to either short-sell it or file bankruptcy. Beyond that, you should consider whether entering into a mortgage modification is the right thing for you to do. It will certainly help you if you get a reduced interest rate, but a principal reduction is a double-edged sword. It can either lift you out form an underwater home, but it also might force you to pay down a lot more debt than you need to.

For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-880-5554 to set up your free consultation.