Modify What Exactly? Modifications in Bankruptcy

Bankruptcy is unfortunately jargon-filled. Worse, some words have different meanings depending on the bankruptcy context. On this blog, I've previously discussed the two meanings of feasibility in bankruptcy. Another word that leads to confusion is modify and modification.

There are three common contexts where the term modify is observed:

1. Plan Modification
2. Voluntary Mortgage Modification
3. Modification of a Claim

Plan Modification

Plan modification is the alteration of the terms of a chapter 13 plan subsequent to plan confirmation. Plan modifications might change the plan payment, the plan duration, or how a claim is treated inside the plan. Court approval is required to modify a plan, and is primarily a remedy to address something that has changed since the chapter 13 case was originally confirmed. Many plan modifications are proposed by the bankruptcy debtor, although the chapter 13 trustee (or even a unsecured creditor) might propose a modification. In particular, if a chapter 13 trustee believes that income has increased during the bankruptcy such that the debtor now has disposable income, the trustee might propose that the plan be modified to pay additional disposable income to creditors. The bankruptcy code deals with plan modification in 11 U.S.C. 1329.

If a plan has yet to be confirmed by the court, the debtor can merely file an amended plan, which takes the place of the prior proposed chapter 13 plan. Formal modification with court approval is not needed.

Voluntary Mortgage Modification

Under HAMP and other programs, mortgage lenders had processes for obtaining modification of a mortgage loan and modification of the mortgage payment. These type of mortgage modifications aren't a product of bankruptcy law, and are available to borrowers inside and outside of bankruptcy. Nevertheless, many chapter 13 filers with a mortgage loan will attempt to arrange a mortgage modification while their bankruptcy proceeds. A successful modification during bankruptcy may reduce the amount that needs to paid to the chapter 13 trustee substantially.

Modification of Claim

By a measure the most technical use of the term, one may see a chapter 13 plan modify the rights of a creditor (claim holder). In the broadest sense, this is the idea that a chapter 13 plan proposes to do something to the debt other than what the contractual note or agreement provides. The most frequent mention of this sort of modification is the anti-modification clause of 11 U.S.C. 1322(b)(2). The anti-modification clause restricts the ability of chapter 13 plans to re-write the terms of mortgages secured by real estate that is the debtor's main home. This is a key reason why many mortgage modifications can't typically be forced on a creditor in a chapter 13 bankruptcy.