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Balloon Mortgage and Bankruptcy
by Adam Mack
So, first of all, what is a "Balloon Mortgage"? It is a loan that is secured by real estate (probably your house) that is designed to have small payments, often interest only, scheduled throughout the life of the loan until the final payment is due, at which time the full amount of the remaining balance of the loan will be due all at once. The term "Balloon Mortgage" has taken on a negative connotation since the housing bubble popped a few years ago. So be aware that banks often refer to such a loan, or similarly styled loans, as something different. But the hallmark of this type of loan are the small payments through the life of the loan and then a large payment(s) scheduled at the end. You can see why the banking industry uses such a financing tool. The bank gets their interest paid up front, then you give their money back or they take your house.
In my opinion, it is little more than a bait and switch, but it is allowed under law, and if you have such a loan you probably consented to it, regardless of whether you really understood how it works. As you can guess, these loans cause problems for many borrowers. So, what can you do now that your big payment is coming due and you cannot come up with the money? This is a precarious situation, but you might find a solution by filing bankruptcy in Kansas.
Generally, a person filing bankruptcy is prohibited from modifying the rights of a creditor who has a secured interest in your real estate (i.e. your house). However, there are exceptions to this anti-modification statute. One exception is found in 11 USC § 1322(c)(2). This statute essentially states that if you have a loan that will become due before the final payment of a your chapter 13 bankruptcy plan, then you can modify the terms of that loan by stretching it out over the length of that plan. It is useful to note that a Chapter 13 plan must run for at least 36 months but no more than 60 months. So, as such, you can theoretically stretch that final balloon payment over a five year period.
However, there are many considerations that need to be analyzed, and every single case is unique with a different set of facts. Filing a chapter 13 plan and forcing mortgage companies to modify their security interests is a complex process; not to mention the fact that your mortgage lender may not come along willingly. You should consult with an experienced Kansas bankruptcy lawyer to help you determine if this route is possible in your specific circumstances and whether it is the best option you have available.