Generally speaking, Chapter 13 bankruptcy gives debtors the right to modify their mortgages by dividing the debt into a secured portion that is equivalent to the value of the property if it were to be sold today and a portion that is considered unsecure. However, this bifurcation usually occurs with properties that are not the primary residence of the creditor, such as a second home or an investment property. For example, a person living in Texas and filing for Chapter 13 bankruptcy might have to forego their summer home but not their primary home.
Surprisingly, recent developments in a case in Ohio might cause the ground to shift and allow debtors to go after primary residences. In a nutshell, a judge believed that, under particular circumstances, a debtor should have the right to secure their debt with the primary residence. Unfortunately, the circumstances that were relevant in this case, the mortgage containing a pledge for escrow funds, tend to be more common than creditors would like.
The ramifications of this case are already starting to be felt with several judges either siding with the aforementioned judge or disagreeing, stating that going after the primary residence was not only improper but also against the initial intent of the code. It is still unclear how things will play out, but the opinions of the objecting judges offer excellent groundwork for an appeal in the 6th Circuit should things go south for a creditor.
Chapter 13 bankruptcy and other types of bankruptcy remain a very convoluted terrain, marred with plenty of misleading myths and misconceptions. Consequently, anyone facing financial difficulty or straining under the weight of exorbitant debt may benefit from proper legal counsel to help them plot their next step.