Is renting out your house a way to save it?

Under the present bankruptcy law, it is very difficult to use a Chapter 13 bankruptcy plan to impose your own mortgage modification on the primary lender for a residential home. There have been near constant efforts to get the Congress to change this, but so far the pleas have fallen mostly on deaf ears.

The source of the problem is the language in Chapter 13 saying the debtor’s plan can “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence.”

Bankruptcy lawyers, naturally, are constantly on the alert for loopholes that get around this limitation. Recently, a bankruptcy court ruling in the District of Columbia focused on the language “IS a debtor’s principal residence.”

What then, could happen if a debtor could prove that he legitimately moved out of his home several months prior to filing the bankruptcy case? In the Roemer case, the DC court ruled that the home was no longer the debtor’s principal residence, and that the mortgage balance COULD be reduced by the debtor through his Chapter 13 plan!

There is no word yet on whether this approach will fly with the Massachusetts bankruptcy court judges. And it also raises another yet-to-be answered question: can a debtor purposely move out of the home, rent it out to tenants, and then modify the loan in a Chapter 13 bankruptcy? Stay tuned.


By Doug Beaton

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