Murrieta Temecula Bankruptcy Attorney David Nelson
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Chapter 7 and 2nd Mortgages and Home Equity Lines of Credit 

While you may be able to strip these off of your home in a Chapter 13,  in a Chapter 7, you may still be able to effectively ignore it 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 in some manner deal with it later. 

IT WORKS PRETTY MUCH LIKE THIS:

 

Your 2nd mortgage has two things over you:
a) they 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

c) and 2nd mortgage bank can foreclose the lien, but in order to do so, it must pay off the 1st mortgage and any unpaid property taxes first.

Bankruptcy Chapter 7 Discharges the Note or the Loan, but you still have the Lien or Trust Deed on your house.

So, what you do is:
1.  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 they have a lien on the house.

2.  If the value is relatively close to the balance on 1st then you will have to deal with the 2nd mortgage sooner than later because eventually the value of the house will go up high enough for the 2nd mortgage company to be able to foreclose.

3.  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.

4.  If the bank sends a 1099 for the "forgiven" balance next year, then you are able to put a deduction for it because it was already "forgiven" or discharged in your bankruptcy. 

5.  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. 

6.  In any case, the Discharge Order from the bankruptcy prohibits collections.  Therefore, they cannot hound you, dunn you, or bother you whether by phone, email or letters for payment of the note.  They have only one option, they can foreclose.  REMEMBER however, that they must pay off the 1st mortgage in order to foreclose. 

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 that company is a credit union, it may be possible that they'd foreclose but if the payment on the 1st is getting paid, then it's still not very likely.

It's risky, however, a chapter 13 which would allow stripping off the 2nd mortgage, is risky too.  Even more so because chapter 13 requires that you immediately go back to paying your regularly scheduled monthly mortgage payments on your 1st, 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 13s 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 a busted transmission. 

Stripping the 2nd mortgage off in a chapter 13 requires that you complete the 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 only if you get a payment that low.  Most are higher. 

So, in summary, making an offer to settle the balance on the 2nd after a bankruptcy, should aim to pay 10% of the balance or less especially if the house is seriously upside down on the 1st mortgage already.  But it does have to be paid in one payment once they accept and they must accept in writing.  You cannot 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. 

Sincerely,
by David Nelson
Bankruptcy Attorney

2nd  Mortgages

Murrieta-Bankruptcy.com

(951) 200 3613 Office

(858) 452 4500 San Diego

(858) 228 9763 Fax

24630 Washington Ave. Ste 202
Murrieta, CA   92562

Let's get that monkey off your home's back.


Chapter 13 Lien Avoidance of your 2nd Mortgage or Heloc

Also known as a Lien Strip Motion in a chapter 13 allows you to not only discharge your balance owing to the 2nd mortgage or heloc but also to remove the lien from the property.

Basically it works this way, if your home's value is less than the balance on the 1st mortgage, then you in theory strip the 2nd mortgage off the house. You have to file paperwork with the court and prove that the property's value is below the balance on the first mortgage.

However, if the value is even just a little bit over the balance on the first then you're stuck with the whole 2nd mortgage. More importantly, if the value is close to the first, what you're probably going to end up with is an expensive evidentiary hearing but that cost can probably be absorbed into the monthly payment plan of your chapter 13 bankruptcy case.

Most of the time most of you will come to my office and formerly your house was worth $500,000 and now you have a first mortgage with a balance of $400,000 and a second or a heloc with a balance of $100,000 and now the house is worth between $200,000 and $300,000.

In that case, when file your paperwork against the lender with the court, the bank holding the 2nd mortgage will capitulate and default your motion to strip their lien off of your house.

Sounds great, except that you still have a house worth probably about $250,000 and a mortgage with a balance of $400,000. Not that there's anything wrong with that, as long as you can afford the payment on the first.

Nevertheless, that's a big difference in value.

Here's the kicker, in order to have the 2nd mortgage lien truly stripped off of your home, you must complete the chapter 13 payment plan. The payment plan will last from 3 to 5 years. On top of that, they'll keep all of your tax refunds while your chapter 13 payment plan is pending.

Your payment might not be very much, it might only be as low as a couple hundred per month and then it's over in 5 years, that's a good deal compared to paying on a $100,000 2nd for 20 years even at a low interest rate. Depending on your income, your payment might be pretty high too.

If something happens to you during your payment plan, such as a longish illness, lose your job, your spouse loses a job, you break your leg, your transmission disintegrates on the freeway one day, the economy changes and the industry you work in crashes, the law changes and your industry is put out of business by the state legislature or congress . . . etc etc.

We already know that approximately 70% of all chapter 13 bankruptcies will eventually fail and end up as a chapter 7. And that percentage may be a lot higher in the last couple of years too.

Make sure you really want to keep that house.

CHAPTER 13 HANDBOOK FOR RIVERSIDE DIVISION


When you file bankruptcy from anywhere in Riverside County your hearing will be in the city of Riverside. Bankruptcy hearings are usually short just a few minutes long.  However, remember that the drive to get there may be 45 minutes to an hour and half and that's only if the traffic is in your favor.

Many bankruptcy attorneys who live far from the court house will never go to the hearing with you.  I try to be there as your bankruptcy attorney representing you in the Riverside hearings. However everyone has scheduling conflicts sometimes.  Nevertheless I do my best to be at every hearing personally.

Whatever the usual legnth of time to get to your Riverside bankruptcy hearing, make sure you double it.  It's not worth the hassel of missing your hearing potentially having it dismissed or postponed and paying to refile the case or even for me to come to a 2nd hearing for you.  Leave plenty of time early and you'll be able to relax because you're not late.  Bring a book.  

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