Bankruptcy Alphabet: M Is For Modify

M is for Modify in my Bankruptcy Alphabet. The Bankruptcy Code provides that a borrower can modify the terms of some secured debts, like car loans, judgment liens, and some mortgages. And in the midst of the current pandemic mess, the automatic stay can prevent foreclosure while a homeowner seeks a mortgage modification on their principal residence.

Generally creditors with liens on a person’s assets fare better in bankruptcy than creditors who have simple unsecured claims like credit card debts. Absent some specific court order, liens pass through bankruptcy unchanged.

Here are some of the ways that a lien can be modified in bankruptcy.

• In Chapter 13, the interest rate on a car loan can be changed to today’s interest rate.
• Some car loans can be reduced to the value of the car today.
• Judgment liens that interfere with exemptions can be reduced or eliminated alltogether.
• Tax liens can be voided or paid to the extent the lien attaches to actual value in some asset of the debtor.

That adds up to a whole lot of modification.

But the modification that is usually at the forefront of thinking after the housing collapse is the modification of home mortgages. A provision of bankruptcy law prevents the modification of home loans on the debtor’s home, so long as there is any equity in the property for the lien to attach to.

With the plunge in property values, many junior liens are now, in fact, totally unsecured. An unsecured lien, even on a home, can be stripped in Chapter 13. Welcome to the world of bankruptcy, where change is everywhere.

Today’s post has been brought to you by the letter M.

M also stands for Means Test, in bankruptcy lawyer Jay Fleischman’s world.

Image courtesy of takomabibelot.