If the pending bankruptcy legislation (the house version) is passed and becomes law, homeowners who modify their mortgage in a Chapter 13 bankruptcy would have the right to sell their home before receiving a discharge. If the homeowner sells his/her home during Chapter 13 bankruptcy with a modified mortgage, the claim may be reduced if the debtor agrees to pay the mortgage creditor a portion of the net sale proceeds.
If the home (with a modified mortgage) is sold within the first year of the Chapter 13 bankruptcy plan, the mortgage creditor would receive 80 percent of the difference between the sales price and the amount of the creditor’s claim. The amount the mortgage creditor would receive reduces as the Chapter 13 bankruptcy plan progresses.
Bankruptcy Year 2 – Creditor receives 60 percent.
Bankruptcy Year 3 – Creditor receives 40 percent.
Bankruptcy Year 4 – Creditor receives 20 percent.
The payment to the mortgage creditor can never exceed the amount of the allowed secured plan.
For example: If a homeowner in Chapter 13 bankruptcy sells his/her home in the second year of his/her repayment plan and has a net sale proceed of $10,000, the creditor would receive $6,000. But if for some reason the creditor’s claim was only $3,000, then the creditor would only receive $3,000.