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Court decision clarifies loan modification rules

South Carolina residents may be interested in learning about a recent ruling made by the Fourth Circuit. As a general rule, a borrower cannot modify a lender's claim if it is secured only by his or her principal residence. The court found that escrow fund interest, insurance proceeds or other mortgage earnings were incidental to the lien. Therefore, they were also not subject to any sort of modification in a chapter 13 case.

In a typical chapter 13 bankruptcy, debts may be labeled as secured or unsecured. In many cases, debtors may try to have some portions of a secured debt reclassified as unsecured. The unsecured portion of the debt is then lumped together with other unsecured claims. In a typical case, very little of the unsecured portion is actually repaid.

When a debt is secured only by the debtor's principal residence, he or she cannot take action to lower the interest rate or extend the term of the loan. However, the court's ruling is significant because modifications may be possible in the event that a lender's interest in the home goes beyond the residence itself. The court came to its decision by reading the deed of trust used by the lender and finding nothing that indicated that funding an escrow account for taxes and insurance was considered as additional collateral.

Those who are looking to stop foreclosures on or repossessions of their properties may benefit from filing for a chapter 13 bankruptcy. Debtors are usually given a stay against creditor collection actions, which may temporarily prevent a foreclosure or repossession from taking place. An attorney may be able to advise someone more about the other benefits of filing for bankruptcy including the potential to cram down unsecured claims.

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