There’s a Chapter 13 bankruptcy case (Plourde, John P. and Debbie M.; In re) that may give us a little glimpse at the strategies mortgage lenders may employ to fight modified mortgages in bankruptcy.

The details of the Chapter 13 Bankruptcy case:

American Home Mortgage Servicing Inc. filed a secured proof of claim of $288,396 and a prepetition arrearage claim of $30,310. The claim was secured by non-residential real estate that the debtors valued at $233,600. American said the property was worth $277,000. The debtors’ plan proposed to pay the secured claim at 4.25 percent annual interest over the life of the loan. American asserted that its claim needed to be paid at 8.25 percent annual interest over the life of the plan.

Since the debtors’ proposed plan to repay the mortgage was different than the mortgage lender’s claim the bankruptcy court defined it as a modification. The bankruptcy court agreed with the mortgage lender saying that since the debtors were seeking to modify the creditor’s claim, the debtors would be required to repay the entire loan over the course of the Chapter 13 bankruptcy. This was impossible for the debtors to do; therefore their Chapter 13 bankruptcy plan was rejected.

As we move forward to approve mortgage modification in bankruptcy, legislators need to make sure that debtors are not held to impossible standards, such as repaying a $233,000 mortgage in full with only 3 to 5 years. For most people that would be impossible.