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Chapter 13 still offers a few ways to modify or erase mortgages

In Washington state, bankruptcy law must follow federal law in many respects. In a Chapter 13, for example, it is no longer allowed for a debtor to modify the terms of the mortgage on the debtor's residence. The U.S. Supreme Court has set forth reasons why this cannot be done, mainly based of the need to give first mortgage lenders on residential properties some assurance that their loan terms will not later be changed in a bankruptcy.

There has been a spattering of cases, however, that have allowed a way around such rulings. For example, if the mortgage takes security over and in addition to the residence then the loan can be modified in a Chapter 13. This means that if there is another piece of property added to the mortgage, it may possibly be exempt from the non-modification provisions of the law.  This trend of cases have also applied the reasoning to the bank's taking a secured interest in escrow funds associated with the loan.

In those decisions, found in some bankruptcy courts throughout the country, escrow funds qualify as property distinct from the residence and therefore the loan becomes subject to modification. This is because the loan does not attach solely to residential property. Generally, these lines of cases have been successful in limited instances,  and in some cases, they have been struck down by appellate court decisions.

It is still possible, however, to eliminate a second mortgage in a Chapter 13 in Washington state and elsewhere. Where the first mortgage amount that is due totally exceeds the value of the real estate, a second mortgage sitting "bare" with no security may be discharged in the case. This requires one's bankruptcy attorney to file a special adversary proceeding to eliminate the second mortgage. As always, when contemplating a bankruptcy, the best way to determine one's options and know the impact of a filing is to obtain a consultation with an experienced consumer bankruptcy attorney.

Source:, "Ohio Courts Could Change Course for Chapter 13 Bankruptcy", LeAnn E. Covey, Jan. 30, 2018

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