Chapter 13 2nd Mortgage Lien Stripping

Chapter 13 2nd Mortgage Lien Stripping

You may be able to strip your 2nd mortgage or home equity line of credit, Heloc, off of your home in a Chapter 13.  Not only can you discharge the loan, or promissory note that you signed when you executed the loan docs, but you may also be able to remove the lien from your home as well.  If the Bankruptcy Judge assigned to your case agrees, then once your chapter 13 case is over, the creditor must release the lien.

You may also be able to remove the 2nd mortgage from a rental property and in addition, you may also be able to reduce the 1st mortgage as well.  Rental property properties have different rules than residences do.  An important distinction, you must remember that if you live in the house, you have fewer options than if you have moved out and rented the place.

IT WORKS PRETTY MUCH LIKE THIS:

A 2nd mortgage, or home equity line of credit, has two things over you:

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a) the have the note that you signed promising to pay
b) they have a deed of trust or trust deed on the house which is a lien on the house
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Chapter 7 Bankruptcy discharges the Note or the Loan, but you still have the Lien or Trust Deed on your house.  Even after your bankruptcy, your 2nd mortgage lender can foreclose the lien, but in order to do so, it must first pay off the 1st mortgage and any unpaid property taxes.

This is a big difference between the two chapters of  Consumer Bankruptcy.  After a chapter 7 is over and completed, the 2nd mortgage could still foreclose on the house later.  Over time, the value of the property will go up. The house will appreciate.  After it’s value increases to a point where the value of the house is greater than the balance on the first mortgage, the 2nd mortgage would be in a position to foreclose the property.

So, what you do is:

1.  Get an appraisal.  We must be able to credibly state that the value of the home is significantly lower than the balance on the 1st mortgage.   If your value is lower but close, you run the risk of expensive litigation in order to strip your 2nd mortgage or home equity line of credit.  Of course, if the balance on the 2nd is large compared to the cost of the litigation, then it’s worth the effort.  As long as you know that the attorney’s fees could be significant as you’re going into the deal, then it’s fine if you want to spend the money.  Nevertheless, those attorney’s fees would be on a three to five year payment plan so it should be manageable.

2.  If the value of the home is lower than the balance on the first and it is significantly lower, then the mortgage lender on the 2nd mortgage or Heloc, Home Equity Line of Credit, won’t fight it, and you’ll win by default.

3.  If the value of the home is greater than the balance on the first, even just a little bit, then you lose and you’re stuck with the whole 2nd mortgage.   Remember however, there is a difference between your primary residence and your rental properties.  Respecting your primary residence, you can only remove your 2nd mortgage, or not.  Rental properties however, can have 2nd mortgages removed, 1st mortgages reduced, or if the value of the home is above the balance on the 1st mortgage, the 2nd mortgage (or heloc) could be reduced so that the total balances on all mortgages are equal to the value of the property.

Caution

Chapter 7s are risky. We don’t know how long it will take the values of our real estate to increase.  If you do a chapter 7, you will discharge the loan, or promissory note.  Nevertheless, you will still have the deed of trust still attached to the house.  So at some point you must settle that 2nd mortgage with that bank.

Chapter 13s are risky too.  They can allow you to strip the 2nd mortgage off the house completely.  Risky because chapter 13 (on your primary residence) requires that you immediately go back to paying your regularly scheduled monthly mortgage payments on your 1st.  If the 1st mortgage has not yet been modified on the date of filing the bankruptcy, then you’d be stuck with the unmodified mortgage payments.

All chapter 13s must be approved by the judge assigned to your case.  Called a confirmation order, many cases end up falling short because people who want to remove the 2nd mortgage often propose payment plans that are unrealistic.  In other words the budgets they propose for themselves are just too tight.  Your attorney will refer to such a budget as unfeasible.  Feasibility just means that you really can afford to make the monthly payment to the bankruptcy trustee on your case.  To be confirmed, a case must be feasible, and you must convince your judge and your bankruptcy trustee that you can afford to to make the chapter 13 plan payments.

Additionally, most chapter 13s never get completed once they are confirmed.  More than 70% don’t get a chapter 13 discharge because something happens that derails the payment plan such as a work stoppage or an illness, or even just a busted transmission.  Either your earning capacity has been reduced or your ability to pay has been eclipsed by a more pressing expense.

Stripping the 2nd mortgage off in a chapter 13 requires that you complete the payment plan.  If your hypothetical plan payment is $350/mo and you pay it for 2 1/2 years that’s a total of $350 x 30 months = $10,500.  What if you cannot pay it anymore because of a work stoppage, you get fired or laid off, you break your leg, your transmission goes bad? You’re not going to complete your chapter 13 payment plan.  Guess what, you just tossed $10,500 out the window.

So, to strip a 2nd mortgage off of your primary residence,

  1. the value of the property must be lower than the balance on your first mortgage
  2. you must be able to pay the 1st mortgage payment,
  3. you must get the judge to agree that you are able to afford the plan payment,
  4. and you must complete the plan which will be 3 to 5 years long.

How Much Will My Chapter 13 Plan Payment Be?

Plan payments depend on a couple things

  1. how much excess income you have at the end of the month
  2. how much the means test says you must pay
  3. how much you owe on unpaid mortgage payments from previously unpaid months called arrears
  4. back taxes and child support
  5. the balance owing on your car
  6. how much of your attorney’s fees were paid in advance
  7. how much you usually get as tax refunds
  8. and several other possible issues

You will have to call for a consultation on the issue in order to get an estimate.

Call 800 FILE AWAY or 800 345 3292, call right now for a consultation.

David L Nelson
Temecula Bankruptcy Attorney
Temecula bankruptcy attorney, Murrieta bankruptcy attorney, Lake Elsinore bankruptcy attorney, Canyon Lake bankruptcy attorney, Menifee bankruptcy attorney, Perris bankruptcy attorney, Riverside bankruptcy attorney, Corona bankruptcy attorney, San Diego bankruptcy attorney, Los Angeles bankruptcy attorney, LA, and Orange County bankruptcy attorney

YOUR HOA MAY SUE YOU EVEN AFTER YOUR BANKRUPTCY

YOUR HOA MAY SUE YOU EVEN AFTER YOUR BANKRUPTCY:

THE BANKRUPTCY CODE SPECIFICALLY ALLOWS IT!  The Rule is that you can eliminate your personal liability to pay your Home Owner’s Association up to the date that you file your case.  But what happens AFTER?

YOUR HOME OWNER’S ASSOCIATION CAN SUE YOU IF:

FILING BANKRUPTCY STOPS FORECLOSURE, BUT YOU MUST STILL EITHER WORK OUT A LOAN MODIFICATION OR SETUP A CHAPTER 13 PAYMENT PLAN IN ORDER TO STRIP OFF THE 2ND AND CATCH UP YOUR FIRST. IF ALL GOES WELL YOU WON’T THINK ABOUT YOUR HOA, YOU JUST CONTINUE TO PAY IT.

IF THE ABOVE DOESN’T WORK OUT, YOUR AIM MUST BE FOR A SHORT SALE to avoid a Foreclosure after Bankruptcy.  Doing a Short Sale will take the Home Owner’s Association into account as part of the final deal and that will be that.

But if you end up with a Foreclosure after Bankruptcy . . .

FORECLOSURE AFTER BANKRUPTCY:

If you know that you can’t pay a Chapter 13 payment (YOU MUST CONSULT A BANKRUPTCY ATTORNEY TO BE SURE, NEVER ASSUME ONE WAY OR THE OTHER WITHOUT A CONSULTATION FIRST), & if you cannot pay your 1st, you are going to lose your property.  So, File a Chapter 7 Bankruptcy: Your 2nd or HELOC will no longer be able to sue once your Chapter 7 has discharged.  You can stay in the property a bit longer while saving up to move. You could get a couple or even several extra months Rent-Free! But if you don’t do a short sale, you will eventually have a foreclosure.

Your HOA will be able to sue you from the date that you filed your Bankruptcy until the day your property is foreclosed.  I have seen this more than once, a couple assumes that a short sale is on track, and then it doesn’t go through.  Meanwhile they have not been paying the Home Owner’s Association fees.  Probably they haven’t paid for a year prior to filing the bankruptcy so they are out of the habit of paying it.  Once the bankruptcy took place, they still didn’t pay because they couldn’t afford to, or they assumed that the short sale would take care of it.

But if you don’t pay, and there’s a foreclosure, you’re going to owe all HOA fees and assessments from the day that you filed until the day that you no longer owned the property. Because they banks don’t want to pay the HOA fees either, I have seen them take a couple years to actually repossess a house, especially if the family has already moved out.  $150/mo in HOA fees plus special assessments, attorney’s fees and costs adds up pretty quickly.

SO CONTINUE TO PAY THE HOME OWNERS ASSOCIATION FEES UNTIL THE PROPERTY IS SOLD OR FORECLOSED.  If you don’t want to pay the HOA Fees to the HOA because you expect a short sale to take care of it, put the HOA Fees into a savings account just in case the short sale doesn’t go through.  If it doesn’t go through you just pay them.  If it does go through, you have a small savings account to use as moving money, or maybe replacing your appliances.

Bankruptcy Attorney David Nelson

Temecula bankruptcy attorney, Murrieta bankruptcy attorney, Lake Elsinore bankruptcy attorney, Canyon Lake bankruptcy attorney, Menifee bankruptcy attorney, Perris bankruptcy attorney, Riverside bankruptcy attorney, Corona bankruptcy attorney, San Diego bankruptcy attorney, Los Angeles bankruptcy attorney, LA, and Orange County bankruptcy attorney