Chapter 7 and Your 2nd Mortgage

Updated on June 13th, 2018.

Refinancing Your Second Mortgage

Yes, it may be an actual option. And as unlikely as it may seem or feel, if you have home equity now (at this writing in 2018) then a refinance may work but only if you have good enough credit. But how do you manage that after having filed a Chapter 7 Bankruptcy? Believe it or not, credit repair services use the same techniques outlined in the following Guide. The Attorney’s Guide to Credit Repair. It’s Fast, Easy and Guaranteed.

In fact many use the very same Guide. Follow this guide to repair your credit fast, including how to write letters to settle debts such as your 2nd Mortgage. Download it Now and Get Started Right Away with The Attorney’s Guide to Credit Repair. It’s Fast, Easy and Guaranteed.

Your 2nd Mortgage or Home Equity Line of Credit – Heloc

While it is true that you may be able to strip these off of your home in a Chapter 13, in a Chapter 7 you can’t, but, you may still be able to effectively ignore it (for a while) and keep your home.  However, the 2nd Mortgage or Heloc would still have a lien on the property.  You would then have to settle the lien or deal with it in some manner later on. Your 2nd or Heloc has two things over you

a) they have the promissory 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 also called a mortgage. 

If you have filed a Chapter 7 Bankruptcy, then the Chapter 7 discharges the Loan or Promissory Note, which means that the mortgage company or lending bank cannot collect money from you directly. They cannot sue you, garnish your wages, levy your bank account, or even ask you for money or anything like that.

If you still own the home, then you still have that 2nd Mortgage Lien called a Trust Deed or Mortgage on your property. Chapter 7 Bankruptcy does not remove that kind of lien from your house, not in the 9th Circuit Appeals Court’s jurisdiction. Therefore, if the value of the house is high enough, then your 2nd mortgage lender can foreclose that lien, but in order to do so, it must pay off the 1st mortgage and any unpaid property taxes first.

Some Things You Can Try Include, But Are Not Limited To: 

1.  Refinance Your Second Mortgage: Yes, it may be an actual option. But if you have bad credit, you will have to repair it first.

2.  If the Value of the house is higher than the balance on your 1st mortgage then you must deal with your 2nd mortgage now.  If it is lower than the balance on your first, then you don’t have to deal with them immediately, but you must deal with them eventually, because, remember, they have a lien on the house.

3.  If the value is relatively close to the balance on 1st mortgage then you will have to deal with the 2nd mortgage sooner rather than later because in not too much time, the value of the house will go up high enough for the 2nd mortgage company to be able to foreclose. If you cannot afford to settle it, you should consider trying a loan modification. 

4.  What most clients will do is make an offer to settle the 2nd mortgage lien in one payment, one time with no balance owing afterwards, and you must get that in writing from the bank before you mail your cashier’s check. You might have to take a massive 401k loan in order to be able to make such an offer, but if they take it, it would be worth it. 

5.  If you have previously filed a bankruptcy and then the 2nd mortgage lender cancels the debt and sends a 1099 for the “forgiven” balance next year, then you are able to deduct the amount because it was already previously “forgiven” or when you filed your chapter 7 bankruptcy and received your chapter 7 bankruptcy discharged. 

6.  Most clients will save as much as possible and then when they get a tax refund next year, they add that with the savings, and if possible, sell a car or some jewelry and then use that to make an offer to settle the lien. (Dear Reader, when I originally wrote this several years ago, most homes had much lower values and so it was so much easier to offer to settle such a second mortgage. However because home values have gone up considerably, it’s nearly impossible to do now.) 

7.  In any case, your Discharge Order from your Chapter 7 Bankruptcy prohibits  all kinds of collections.  Therefore, they cannot hound you, dunn you, or bother you, whether by phone, email or letters demanding payment of the loan or promissory note.  They have only one legal option, they can foreclose. It doesn’t mean that they won’t but knowing your rights, that they cannot, at least you can protect yourself.  REMEMBER however, that the 2nd Mortgage must pay off the 1st Mortgage in order to foreclose.

8.  If your home has significant value which it probably does, the loan modifications are an option to protect your home, and if necessary, selling your home as a method of preserving the home equity is also a great option. Not that those are the best options, but they are options. Additionally, Chapter 13 Bankruptcy may be a viable option as well.

THEREFORE, the probability of them foreclosing is lower and lower when the value of the house is lower than the balance on the 1st mortgage.  It’s simple math, they won’t pay off a $200K loan to get a $150K asset that they can then resell and only recoup $150K and they’d have to pay closing costs to sell it so they’d only net $120K. That would be a loss of $80K plus they would also lose all of the 2nd mortgage too which is probably another $50K or more on top of the $80K.

HOWEVER, when the 1st and 2nd are held by the same company and particularly if that company is a credit union, it may be possible that they’d foreclose anyway but if the payment on the 1st is getting paid, then it’s still not very likely.

Overall, when dealing with a 2nd mortgage, it’s risky, no matter what happens. A chapter 13 which would allow stripping off the 2nd mortgage, is risky too.  Even more so because your Chapter 13 Bankruptcy requires that you immediately go back to paying your regularly scheduled monthly mortgage payments on your 1st mortgage, and if the 1st was not yet modified on the date of filing the bankruptcy, then you’d be stuck with the unmodified mortgage payments. Also, most Chapter 13 Bankruptcies never get completed.  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 something unexpected such as a busted transmission. Stripping the 2nd mortgage off in a chapter 13 requires that you complete the three to five year payment plan, so it’s majorly risky because if you have a hypothetical plan payment of $350/mo and you pay it for 2 1/2 years and then if you cannot pay anymore and you don’t get your plan completed, guess what, you just tossed $350 x 30 months out the window.  That’s $10,500 that you’ll never get back, and that’s only if you get a payment that low to begin with.  Most are higher.

In Summary:

Offer to Settle Your 2nd Mortgage

So, in summary, making an offer to settle the balance on the 2nd after a Chapter 7 Bankruptcy, should aim to pay (I originally wrote 10% of the balance or less, but nowadays the percentage at this writing in 2018, must be much higher). However if the house is seriously upside down on the 1st mortgage already, you may be able to offer lower. But it does have to be paid in one payment once they accept and you must get them to accept it in advance in writing. You must not pay them unless you have it from them in writing that they will accept your settlement offer and that they will RELEASE the lien once they get the payment.

I’ll say it again just in case you didn’t hear me, they must agree to RELEASE the lien in writing once they get your payment. If they don’t agree to release the lien, don’t send the check.

Refinancing Your Second Mortgage

1.  Refinance Your Second Mortgage: Yes, it may be an actual option. And as unlikely as it may seem or feel, if you have home equity now (at this writing in 2018) then a refinance may work but only if you have good enough credit. But how do you manage that after having filed a Chapter 7 Bankruptcy? Believe it or not, credit repair services use the same techniques outlined in the following Guide. The Attorney’s Guide to Credit Repair. It’s Fast, Easy and Guaranteed.

In fact many use the very same Guide. Follow this guide to repair your credit fast, including how to write letters to settle debts such as your 2nd Mortgage. Download it Now and Get Started Right Away with The Attorney’s Guide to Credit Repair. It’s Fast, Easy and Guaranteed.

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