A potential solution to underwater mortgages


The failout from the Great Recession continues to plague the nation, with too many houses underwater, saddled with impossible mortgage debts. A recent Connecticut federal district court decision, In re Rogers, reports a failed attempt of a debtor to maneuver herself out of an upside down situation, but inadvertently may have shown a light on one out for a certain group of property owners.


The background of In re Rogers

Two weeks after obtaining a Chapter 7 discharge from her in personam debts, that is, debts not secured by real property, the debtor filed a Chapter 13 petition in order to obtain relief from a $210,000 debt secured by a mortgage on a three-unit condominium now valued at $62,000. The debtor’s plan was to “strip down” the mortgage to the fair market value of the underlying property, that is, to modify the undersecured portion of the loan-approximately $155,000-into an unsecured claim that would receive no payout. The mortgage claim of $62,000 would remain on the property.


The Bankruptcy Code’s antimodification provision

Under the Bankruptcy Code, an in rem lien (for example, a mortgage) that is undersecured-as opposed to wholly unsecured-may not be voided if the lien is secured only by a security interest in real property that is the debtor’s principal residence. Since the debtor lived in one of the three condos as her principle residence, she was ineligible for a strip down. However, the District Court did note that there was a method by which the debtor may have accomplished her goal, but that the debtor did not raise that issue before the Bankruptcy Court nor on appeal, so that argument was lost. The crux of the argument is a 1998 Connecticut decision that holds that the anti-modification provision does not apply to a claim secured by a multi-unit property in which only one of the units is the debtor’s principal residence.


The court continued to hold that the debtor’s filing her Chapter 13 petition for the principal purpose of “stripping down” a mortgage lien that had passed through the debtor’s prior Chapter 7 case did not implicate the kind of abusive and manipulative practices affecting the plan’s, or the petition’s, good faith, and was not properly characterized as a successive petition that had been filed to circumvent the prohibition on lien stripping. Failure to act in good faith can result in the dismissal of the Chapter 13 case.


If you have found yourself to continue to be underwater despite the signs of recovery in the housing market, contact an attorney experienced in bankruptcy and financial matters who can assist you in making the decision right for you. Sometimes toughing it out is not the right decision.