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Archive for the ‘stripping second mortgage’ tag

Your Paid-Current Home Mortgage in Chapter 7 and 13

November 29th, 2017 at 8:00 am

There are scenarios when you are current on your home mortgage and are dealing with other home-related debts where Chapter 7 works well.

 

You’re current on your home mortgage payment, although you’ve been struggling mightily to keep it that way. You’re thinking very seriously about getting some financial help through bankruptcy. But you absolutely want to keep the home that you’ve fought so hard to keep current.

You’re trying to decide between Chapter 7 and Chapter 13, and are about to see a bankruptcy lawyer. So far you see some advantage in one or the other, or maybe in both. Maybe Chapter 7 is attractive because it seems easier and quicker. Or maybe Chapter 13 looks better because it handles certain of your special debts better. Either way you want to make sure you can keep paying your mortgage so you can keep your home.

How does this work in Chapter 7 and Chapter 13? Today we’ll start with Chapter 7, and get to Chapter 13 later.

Chapter 7

If you’re current on your home mortgage payments you can virtually always keep your home under Chapter 7 “straight bankruptcy.”

A big set of considerations is whether you are also current on and/or have manageable ways to deal with other debts on your home.

Other Home-Related Debts

There are other debts related to your home that can cause significant problems even if you’re current on your mortgage. Some of these debts are better handled under Chapter 13 “adjustment of debts.” Some are tremendously better under Chapter 13. On the other hand some are handled just fine under Chapter 7. How these considerations apply to your situation can often affect which of these two options would be better for you.

These other home-related debts include the following:

  1. Second or third mortgages
  2. Property taxes
  3. Income tax owed with a lien recorded on your home
  4. Judgment with a lien attached to your home
  5. Homeowner association debt with a lien
  6. Child/spousal support unpaid with a lien

Current on or Make Arrangements to Pay Home-Related Debts

Chapter 7 likely makes sense in the following situations with the types of debts just listed above. Generally these are when you’re either current on these debts or can make reasonable arrangements to pay them. We’ll cover the first 3 of these types of debts today and the other three in our next blog post.

1. Second or third mortgages:

Chapter 7 makes more sense if your home is worth than your first mortgage debt balance. (Or the combination of your first and second mortgage balances if you have a third mortgage.) Plus you’re current on your second (and, if applicable, your third) mortgage. If you’re not current you’ll be able to catch up fast enough to satisfy that mortgage lender.

If, however, your home is worth less than your first mortgage, you may be able to “strip” your second mortgage from your home’s title. This is only available through Chapter 13. “Stripping” your second/third mortgage could save you a tremendous amount of money. That would often make Chapter 13 a potentially much better option. (Similarly if you have a third mortgage and your home is worth no more than the first two mortgage balances.)

Also, if you are significantly behind on your second and/or third mortgage but don’t qualify for “stripping” that mortgage, you may need the extra help that Chapter 13 can give in getting caught up.

2. Property taxes:

If you’re current on your property taxes of course you’ll need to stay current. Discharging all or most of your other debts in a Chapter 7 case should make this easier.

If you aren’t current you’ll need to do so quickly or else your mortgage lender will be very unhappy. Even if current on your mortgage, falling behind on your taxes is a separate basis for foreclosure by your lender. If you can’t catch up fast enough on your property taxes to satisfy your lender, you may need Chapter 13 to buy more time.

3. Income tax owed with a lien recorded on your home: 

Usually, under Chapter 7 you have to pay a tax that is backed up by a lien on your home. You also have to pay the ongoing interest and penalties. If the debt is relatively small, and you can make the monthly payments required by the IRS or state, Chapter 7 may be your best option.

However, is the underlying income tax old enough so that it could be discharged if there was no lien? Is there insufficient equity in the home to cover the entire tax lien? In these situations you may avoid paying such a tax, or paying only a portion, under Chapter 13.

(Again, we’ll cover the final three types of debts listed above in our next post in a couple days.)

 

A Sample Completed Chapter 13 Case

September 13th, 2017 at 7:00 am

What does the completion of a successful 3-to-5-year Chapter 13 case look like? What happens to your assets and debts? 

 

The Sample Chapter 13 Case

In our last blog post we wrote about completing a Chapter 13 “adjustment of debts” case. We focused on the benefits you get at the tail end of your case, and on the case’s final events.

But like so many other bankruptcy procedures, Chapter 13 completion makes much more sense when tied to tangible facts.

So imagine a Chapter 13 case filed to catch up on a home mortgage, “strip” a second mortgage, catch up on some property taxes, and deal with some IRS income taxes.

Henry and Heather had been $7,500 behind on their first mortgage and so at risk of foreclosure. The situation was worsened because they were also $3,000 behind on their home’s property taxes. They hadn’t paid on a $30,000 second mortgage in months, so that mortgage holder was also threatening foreclosure.

On top of this they owed $10,000 in income taxes from several years ago when they had to close down a business. That business had started their downward financial spiral. They also owed $5,000 for last year’s income taxes, plus $90,000 in a combination of medical and credit card debts.

Their Chapter 13 Plan

Three years ago Hannah and Henry’s bankruptcy lawyer had recommended they file a Chapter 13 case. Their Chapter 13 payment plan enabled them to do the following:

  • Catch up on the $7,500 in late mortgage payments over the course of those 3 years.
  • Catch up on their $3,000 in property taxes over the same period.
  • Keep current on their ongoing mortgage and property taxes by budgeting for these obligations.
  • Prevent either their mortgage lender or the county tax collector from foreclosing or taking any other action to collect.
  • “Strip” their second mortgage from their home by establishing that all of its equity was exhausted by the first mortgage.
  • As a result they could stop paying the second mortgage and did not have to catch up on the arrearage. The entire $30,000 balance was treated as an ordinary unsecured debt.
  • Treat the older $10,000 in income taxes as an ordinary unsecured debt.
  • Pay newer $5,000 income tax debt as a “priority” debt, but without any further interest or penalties. Prevent the IRS from taking any collection action while paying it as their budget allowed.
  • Pay only 2 cents on the dollar on all $130,000 in their remaining unsecured debts: the $30,000 second mortgage, the $10,000 in older income tax, and $90,000 in medical/credit card debts. They could pay only $2,600 on this $130,000 because that is all that was available in their budget during their 3-year payment plan after paying the debts above.

The Completion of the Case

Now after 3 years Henry and Hannah have finished paying enough into their Chapter 13 plan to accomplish the above. Their Chapter 13 trustee so informs them, their lawyer, and the bankruptcy court. Then the following happens:

  • The bankruptcy judge signs a discharge order. That discharges—legally writes off—the unpaid 98%—$127,400—of the $130,000 of ordinary unsecured debt. That debt is gone.
  • Hannah and Henry are now current on their first mortgage and property taxes.  
  • Their “stripped” second mortgage is completely off their home’s title. This puts them that much closer to building equity again in their home.
  • They are current on income taxes, having discharged most of the older taxes and paid off the more recent $5,000.  
  • The court closes their Chapter 13 case.
  • Henry and Hannah are completely debt-free except for their caught-up mortgage.

 

A Second Mortgage “Strip” through Chapter 13

September 6th, 2017 at 7:00 am

If you own a home with a qualifying 2nd or 3rd mortgage, one of the best reasons to file a Chapter 13 case is to “strip” off that mortgage.  

 

Chapter 13 can help you keep your home in many powerful ways. Of those “stripping” a second or third mortgage can likely save you the most money. If you qualify, you can stop paying that mortgage immediately. And it can save you a tremendous amount of money in the long run.

Second or Third Mortgage Under Chapter 7 “Straight Bankruptcy”

If you file a Chapter 7 case you are not able to “strip” a mortgage. You simply have to pay any second and third mortgages on your home or lose the home. The mortgage is a lien on your home, so you have to pay it or the mortgage lender will foreclose on your home.

If your home is worth less than the combined balances of your first and second mortgages you may be able to sell your home through a “short sale.” In this situation the second mortgage lender accepts less than its full balance when you sell the home. But you may be left owing the balance. And in any event, this is not a way to keep your home.

The Chapter 13 Mortgage “Strip”

Only Chapter 13 gives you the possibility of “stripping” that junior mortgage lien off your home’s title. The key factor in qualifying is your home’s value. A second mortgage can be stripped from the home’s title if ALL of the home’s value is encumbered by liens that come ahead of the second mortgage lien on the home’s title. All of the home’s equity is taken up by the prior liens, leaving no equity for that second mortgage.

Under this situation the second mortgage debt is effectively unsecured. What’s special about Chapter 13 is that it provides a way for a court to declare this debt to be unsecured debt. Then that second (or third) mortgage is treated accordingly.

This means that in your Chapter 13 plan you no longer have to make your monthly payments on that mortgage. Instead, during life of your payment plan you pay it only as much as you can afford to pay. This means other special debts can be paid in full before that stripped mortgage debt receives anything. The mortgage balance is lumped in with all your other low-priority “general unsecured” debts. This usually means that you pay only pennies on the dollar on that mortgage debt. Then no matter how long you were contracted to pay that mortgage, at the end of the 3-to-5-year Chapter 13 case the unpaid portion is permanently written off. Your home gets much closer to having future equity through stripping away that second or third mortgage.

Here’s an example to show how this powerful tool works.

The Example

Assume that you’ve owned a home for 10 years now worth $300,000. It lost a lot of value during the “Great Recession” of 2008-2010 and hasn’t gained it all back yet. You owe a first mortgage of $310,000 and a second mortgage of $20,000. The second mortgage has monthly payments of $325, with a bit more than 8 years to pay on it. It has a high interest rate of 8%—your credit wasn’t the best when you got this second mortgage loan.

Let’s also say that you were unemployed for several months and so you fell behind on both mortgages. You are thousands of dollars behind. You also fell behind on other debts. You have found a new job but it doesn’t pay as well as the earlier one. So you need relief from your debts and need help in preventing your home from being foreclosed.

You really want to keep your home instead of walking away from it. It’s been the family home for a long time. It’s close to your new job, and to the schools your kids have been going to. Home and apartment rents are rising in your area, so any other housing would be expensive. Mortgage qualifying standards are tighter now than they were before the Great Recession. So you know that it would be quite a while before you could buy a home again.

So you need a Chapter 13 “adjustment of debts” to catch up on your home obligations and to deal with your other debts.

“Stripping” Your Second Mortgage

In this scenario you’d be able to “strip” your $20,000 second mortgage off your home’s title through Chapter 13. Your bankruptcy lawyer would file a motion in the bankruptcy court to do so. Those papers would show that the home’s value—$300,000—is less than the amount of the first mortgage—$310,000. So all of the home’s equity is fully taken up by this first mortgage lien, which is legally ahead of the second mortgage. So the bankruptcy judge would declare the second mortgage lien to be “stripped” off your home’s title. Then the debt you owe on the second mortgage—the $20,000—would be treated as an unsecured debt.

The Great Results

As a result:

  • You could immediately stop making the $325 monthly payments. This would make it that much easier for you to pay the monthly payments on the first mortgage.
  • You would not need to catch up on the second mortgage late payments. So during your Chapter 13 case you could concentrate on catching up on your first mortgage. If behind on 6 payments of $325 on your second mortgage, that’s $1,950 you would not have to pay.
  • Your now-unsecured $20,000 second mortgage balance is treated like any other unsecured debt. So you’d pay it only as much as you could afford to during the 3-to-5-year life of the plan. In most plans there is only a certain amount available to pay all unsecured creditors. So, adding the second mortgage balance often doesn’t increase what you pay into your payment plan.
  • When you get to the end of your Chapter 13 case the entire unpaid second mortgage balance is “discharged.” It is legally written off. The resulting savings would be substantially more than the $20,000 present balance. That’s because of the substantial amount of otherwise accruing interest that you would also avoid paying.
  • Stripping the second mortgage off your home’s title would get you substantially closer to building equity in your home.

 

A Second Mortgage “Strip” through Chapter 13

July 8th, 2016 at 7:00 am

“Stripping” off a second mortgage has major immediate and long-term benefits.

 

In a blog post last week we listed 10 ways Chapter 13 helps you keep your home. Here’s the second one of those:

2. Stripping Second or Third Mortgage

Under Chapter 7 you simply have to pay any second (and third) mortgages on your home or lose the home. However, Chapter 13 gives you the possibility of “stripping” that junior mortgage lien off your home’s title. This could potentially save you hundreds of dollars monthly. You could also end up paying just a fraction of the entire balance, or sometimes paying none of it all. That could save you many thousands or even tens of thousands of dollars in the long run.

How do you qualify for this junior mortgage lien “stripping”? The key factor is your home’s value. The second mortgage can be “stripped” from the home’s title if the entire value of the home is fully encumbered by liens legally superior to the second mortgage lien. “Legally superior” liens are those liens ahead of the second mortgage lien on the title.  All of the home’s equity is fully absorbed by liens ahead of it on the title. So the second mortgage debt is declared to be an unsecured debt, and is treated accordingly.

To bring this explanation to life let’s show how this incredible tool works by example.

An Example

Assume that your home is worth $200,000. It lost a lot of value during the “Great Recession” of 2008-2010 and hasn’t gained it back yet. You owe a first mortgage of $210,000 and a second mortgage of $18,000. The second mortgage has monthly payments of $250, with a bit more than 8 years to pay on it. It has a high interest rate of 8%—your credit wasn’t the best when you got this second mortgage loan.

Also assume that you were unemployed for a spell and so fell behind on both mortgages, as well as on other debts. You have a new job but it doesn’t pay as well as the earlier one, so you need help.

You very much want to keep your home. You’ve had it forever and it’s close to your new job. Home and apartment rents are rising in your area. You know that mortgage qualifying standards are tighter now than they were before the Great Recession. So for good reason you’re afraid that it would be a long time before you could buy a home again.

So you need a Chapter 13 “adjustment of debts” to catch up on your home obligations and to deal with your other debts.

“Stripping” Your Second Mortgage

In this scenario you’d be able to “strip” your $18,000 second mortgage off your home’s title through Chapter 13. Your bankruptcy lawyer would file special papers in the bankruptcy court to do so. Those papers would show that the home’s value—$200,000—is less than the amount of the first mortgage—$210,000. So all of the home’s equity is fully absorbed by the lien legally ahead of the second mortgage. As long as the bankruptcy judge accepts this to be true, he or she would declare the second mortgage lien to be “stripped” off your home’s title. Then the debt you owe on the second mortgage—the $18,000—would be treated as an unsecured debt.

The Great Benefits

A number of very good consequences would flow from this.

  • You could immediately stop making the $250 monthly payments. This would make it easier for you to pay the first mortgage’s monthly payments.
  • To the extent you were behind on the second mortgage, you would not need to catch up. This means that during your Chapter 13 case you could concentrate on catching up on your first mortgage. If behind on 6 payments of $250 on your second mortgage, that’s $1,500 you would not have to pay.
  • Your now-unsecured $18,000 second mortgage balance is treated in your Chapter 13 payment plan just like any other unsecured debt. That is, you’d pay it only as much as you could afford to during the 3-to-5-year life of the plan. In most plans there is only a certain amount available to pay all unsecured creditors. So adding the second mortgage balance often doesn’t increase what you pay into your payment plan. It’s not unusual for the second mortgage balance to be paid only a few pennies on the dollar. In fact, sometimes you pay NOTHING on that second mortgage balance (and on your other general unsecured debts).
  • At the end of your successful Chapter 13 case the entire unpaid second mortgage balance is “discharged”—legally written off. Assume for a moment that your payment plan allowed you to pay nothing on this second mortgage balance. Realize that the resulting savings would be substantially more than the $18,000 present balance. That’s because of the substantial amount of otherwise accruing interest that you would also avoid paying. The $18,000 balance at 8% with $250 payments would take a little more than 8 years to pay off, thus including about $6,600 in interest you’d also avoid paying.
  • Lastly, “stripping” the second mortgage off your home’s title would greatly improve your potential equity picture. Instead of owing $228,000 ($210,000 first mortgage + $18,000 on the second mortgage), you’d owe only $210,000. You’d be that much closer to building equity in your home as you paid down the first mortgage and as the home increases in value.

 

Escape Your Underwater Second Mortgage

May 20th, 2016 at 7:00 am

If your second (or third) mortgage is not backed by any equity in your home, you can “strip” that mortgage off your home’s title.

 

Our last two blog posts were about using Chapter 13 “adjustment of debts” as a practical way to catch up on late mortgage payments and property taxes. You always have to get current on property taxes and virtually always have to with your primary mortgage obligation. Chapter 13 gives you the time and protection to do this.

But if you have a second or third mortgage, you might not have to catch up at all. You may be able to “strip” that mortgage from your home. If so, you also won’t have to make the monthly payments going forward. And you would likely not have to pay any more into your 3 to 5-year Chapter 13 plan than if you didn’t have that second or third mortgage. Then at the end of the plan whatever is still owed on that mortgage would be forever written off.

IF No Equity Backing Up the Second (or Third) Mortgage

A mortgage “strip” only works if ALL of your home’s value is taken up by a lien or liens legally superior to the junior mortgage at issue. Liens legally superior usually (but not always) mean liens backing up debts which were recorded on your home earlier.

The mortgage attempting to be “stripped” can have no home value securing it at all.

Here are two examples.

First a very straightforward one: a home worth $200,000 with only two liens, a first mortgage with a balance of $205,000 and a second mortgage with a balance of $15,000. All of the home’s $200,000 of value is taken up by the $205,000 first mortgage, leaving none of that home value to secure the $15,000 second mortgage. That second mortgage could thus be “stripped” from the home in a Chapter 13 case. ($200,000 minus $205,000 = no equity.)

Second, a less straightforward example: a home worth $200,000, with an overdue property tax debt and lien of $4,000, a past due homeowners’ association fee and lien of $3,000, a first mortgage of $195,000, and a second mortgage of $15,000, with the liens legally arranged in that priority order. Without the property tax and homeowners’ association liens, not all of the home’s $200,000 of value would have been taken up by the $195,000 mortgage. So the $15,000 second mortgage would have been partially secured by the home’s value, and thus unable to be “stripped.” ($200,000 minus $195,000 = $5,000.)

But with the $4,000 owed in property taxes and $3,000 in homeowners’ association dues, and both secured by superior liens, all of the home’s $200,000 is taken up by the combined liens ($4,000 + $3,000 + $195,000 = $202,000), leaving none of that home value to secure the $15,000 second mortgage. That second mortgage could thus be “stripped” from the home in a Chapter 13 case. ($200,000 minus $202,000 = no equity.)

Effect of a Mortgage “Strip”

In a Chapter 13 case—but NOT in a Chapter 7 “straight bankruptcy” one—“stripping” the second mortgage in effect legally acknowledges that the debt owed in that second mortgage is completely unsecured. So it is treated just like your other “general unsecured” debts—medical bills, credit cards, unsecured loans, etc.

The pool of all your “general unsecured” debts in a Chapter 13 case are usually paid only to the extent that you have money left over in your budget to pay them. 

Sometimes all of the available money during the term of your court-approved payment plan is used for catching up on your first mortgage, property taxes, and other essential “priority” debts (such as recent income taxes and/or back child support), so that there is nothing available for the “general unsecured” debts, including your second mortgage balance. So you’d pay your second mortgage nothing.

But even in the more common situations in which you did have some money available for the “general unsecured” debts, you would usually not have to pay any more towards those debts because of the second mortgage. That’s because usually you are obligated to pay a set amount towards that entire pool of “general unsecured” debts—based on what you can afford to pay after paying the more important debts. Almost always that set amount that you can afford to pay over the life of your payment plan only pays a portion—and often only a small portion—of the debts in that pool. The existence of the second mortgage debt just shifts around the same amount of money paid into the pool of “general unsecured” debts among those debts.

For example, assume you have a $15,000 second mortgage debt and $25,000 in other “general unsecured” debts, so a total of $40,000 of all your “general unsecured” debts. Your Chapter 13 plan has you paying a total of $5,000 towards this pool of “general unsecured” debts, each of which gets paid pro rata.

If you didn’t have the second mortgage debt, that $5,000 would be divided among the $25,000 of debts, with each receiving 20% of its debt. After “stripping” the second mortgage and turning it also into a “general unsecured” debt, now the $5,000 being paid into that pool would be divided among the $40,000 of debts, now with each receiving 12.5% of its debt.

Again, the $5,000 paid to that pool didn’t change. Most of the time how much you pay to the “general unsecured” debts doesn’t change with an increase in the amount in the pool.

Conclusion

So for practical purposes, “stripping” your second mortgage means you can immediately stop making payments on it, you don’t have to catch up on any missed payments, and you don’t effectively pay any more on it going forward.

Then at the end of your successful Chapter 13 case whatever balance you owe at the end is legally “discharged”—written off forever, and the lien taken off your home’s title.

If you have a second or third mortgage with no equity supporting it, that may be reason enough to choose Chapter 13. Because again this “stripping” cannot be done in a Chapter 7 case. 

 

A Fresh Start by “Stripping” Your Second Mortgage

January 25th, 2016 at 8:00 am

Stripping your second mortgage could give your home the very best fresh start by saving you a tremendous amount of money.

 

If You Can’t Afford the Monthly Payments on Your Home

Last week we compared three ways to save a home in which you’re behind on your mortgage payments: mortgage modification, a forbearance agreement, and Chapter 13.

Mortgage modification is the only one of these three which lowers the monthly payment on your first mortgage. A forbearance agreement just gives you a number of months to catch up on missed mortgage payments, during the same time that you are also required to make the usual monthly mortgage payments. Chapter 13 is similar except giving you much longer to catch up, up to 5 years. Stretching out the catch-up time greatly reduces the amount you have to pay per month compared to a forbearance agreement.

The problem is that mortgage modification is difficult to qualify for. Whether using a governmental program or one provided directly by your mortgage lender, there is a quite narrow window that your income must fit into in order to qualify. So what do you do if you don’t qualify for mortgage modification but still can’t afford what you have to pay each month towards your home?

Chapter 13 “Strip” Can Make a Dramatic Difference

One possibility If you have a second or third mortgage is to “strip” that mortgage off your home’s title through a Chapter 13 “adjustment of debts.” If you qualify you could immediately stop paying that mortgage’s monthly payments. So even though you’d have to pay your full first mortgage payment, not having to pay your second (or third) mortgage payment may make it affordable to keep your home.

Mortgage “Strip” May Make Chapter 13 by Far the Best Option

Such a mortgage “strip” could even be much better than a mortgage modification, both short-term and long-term.

A mortgage “strip” could be better short-term by making it cost less to keep your home. Not having to pay the second mortgage monthly payment could reduce what you have to pay more than a first mortgage modification would save you each month.

Consider this example. If the monthly payment on a first mortgage would be $1,250 and on a second mortgage $375, or a total of $1,625, “stripping” that second mortgage would result in the homeowner paying only the first mortgage payment each month, or $1,250. Even if a first mortgage modification would have brought the payment down significantly, say to $1,050 per month, that plus the regular second mortgage payment of $375 would still leave the homeowner paying $1,425 per month. That’s more than the $1,250 per month with the second mortgage “strip.”

A second mortgage “strip” can also be better long-term because it very likely reduces the total you’d pay on your home compared to a mortgage modification. That’s because mortgage modification seldom includes a reduction in the principal to be paid on the debt. Instead the reduced monthly payment often comes with a steep long-term price tag—much more interest has to be paid because the payments on the same principle is usually stretched out over a longer period of time.

In contrast the second mortgage “strip” effectively reduces the principal owed on that mortgage to nothing or very little, lowering the amount owed on the home by that amount. That’s especially saves money in the long-run because second mortgages tend to have higher interest rates than first mortgages.

Consider the example of a home with a first mortgage of $200,000 at a 5% interest rate and a second of $35,000 at a 9% interest rate. Depending on how long the homeowner stays in the home paying the mortgages, the amount of interest paid often greatly exceeds the amount of principal paid. By not having to ever pay all or much of that $35,000 higher-rate second mortgage, the homeowner can hugely reduce the amount of combined interest and principle paid in subsequent years.

Qualifying for a Mortgage “Strip”

To strip a second mortgage from your home’s title, the value of the home must be less than the combined amount owed on the first mortgage plus any other liens—such as for property taxes—that are legally ahead of that second mortgage. In other words, there can’t be any equity in the home that secures the second mortgage. All the equity must be eaten up by the amount of the second mortgage, unpaid property taxes, homeowner’s association arrearage and such.

To strip a third mortgage from your home’s title, the value of the home must be less than the combined amount owed on the first and second mortgages plus any other liens—such as for property taxes—that are ahead of that third mortgage.

Chapter 13 Only, and Only Successful Ones

There is no ability to “strip” a mortgage in a Chapter 7 “straight bankruptcy.” You have to file a Chapter 13 “adjustment of debts,” which usually takes 3 to 5 years to finish.

And you have to successfully get to the end of your Chapter 13 case by making your court-approved plan payments and meeting other requirements. After you’ve done so, your second (or third) mortgage lien is stripped off your title. Whatever portion of that mortgage that has not been paid through the Chapter 13 payment plan is then discharged—legally written off. Your home no longer has that mortgage on its title or has any of that debt against its equity.

 

Chapter 7 and Chapter 13–Stripping a Second (or Third) Mortgage

October 21st, 2015 at 7:00 am

Stripping a mortgage from the title to your home could save you a tremendous amount of money.

 

 

Two blog posts ago our topic was getting rid of judgment liens, which can be done under either Chapter 7 “straight bankruptcy” or 13 “adjustment of debts.” So if you have a judgment lien (or two) on your home’s title, that will not push you towards one Chapter or the other.

But stripping a second mortgage can only be done through Chapter 13. Because stripping a mortgage from your home’s title can save you so much money, it is often the major reason to file under Chapter 13 instead of Chapter 7.

The Benefit of Stripping Your Second and/or Third Mortgage

If you qualify to remove, or strip, a mortgage from your home’s title, you would not have to pay that mortgage’s monthly payments, would likely pay only a fraction of that mortgage, and get much closer to building equity in your home. Under the right conditions, you can get rid of the debt you owe on a second or other junior mortgage, and get rid of the lien on your home’s title securing that debt.

You can do this by filing a Chapter 13 case if the value of the home is less than the amount owed on the your first mortgage plus any other liens that are ahead of the mortgage being stripped (such as for property taxes or a homeowners’ association).

Lien Stripping

Usually in bankruptcy a lender’s rights to its collateral are respected and protected. For example, if you want to keep your vehicle you have to pay the lienholder. So it’s both unusual and very beneficial to you to be able to get rid of a junior mortgage debt as well as its mortgage lien on your home.

Stop Monthly Payments

If you file a Chapter 13 to strip your second or third mortgage you immediately no longer have to make the monthly payments on that mortgage. And if you were behind on those mortgage payments, you do not have to catch up on those payments.

Improve Your Equity Position in Your Home

If you can get strip a second or third mortgage doing so can bring you much closer to creating equity in your home.

An example will show you how this works. If you had a home worth $200,000, with a first mortgage of $210,000 and a second mortgage of $30,000, you could likely strip that second mortgage through Chapter 13. Instead of having a negative equity of $40,000 ($10,000 from the first mortgage plus $30,000 from the second), after the lien strip the negative equity would be only $10,000, bringing the home much closer to building equity through future increases in the value of the home.

What Happens to the Debt Owed on the Stripped Mortgage?

Chapter 13 allows you to treat the debt being stripped of its mortgage like a “general unsecured” debt.  Those are debts with no lien on anything you own, which are paid only as much as your budget enables you to pay during the life of your 3-to-5-year Chapter 13 case, which is often not very much.

That’s because you are allowed, indeed required, to pay your secured debts and “priority” debts ahead of the “general unsecured” ones. Secured debts include vehicle loans and first mortgage arrearage. “Priority” debts include, for example, income taxes that are not old enough to be discharged (written off), any child and spousal support that you’re behind on, and other legally important debts.

As a result the debt on your mortgage that’s being stripped is usually paid only a few pennies on the dollar, and sometimes nothing at all.

Furthermore, because in most cases you only have to pay a certain amount to the entire pool of your “general unsecured” debts, adding your mortgage debt to that pool usually doesn’t increase what you have to pay in “general unsecured” debts.

For example, let’s say your budget over the course of your 3-year Chapter 13 payment plan requires you to pay—beyond what you are paying to secured and “priority” debts—$5,000 to the pool of your “general unsecured” debts. Imagine that you owe $20,000 in credit card and medical debts, and $30,000 on a second mortgage being stripped. Without that second mortgage debt, the $20,000 in credit card and medical debts would be paid 25%—$5,000 out of the $20,000 owed. When you add the $30,000 second mortgage debt to this pool of “general unsecured” debts the pool increases to $50,000. Paying the same $5,000 during the 3-year plan towards this $50,000 in debt results in the debts now being paid only 10%—$5,000 of the $50,000 owed. The amount you would pay—$5,000—would not change; it would just be spread out over more debts, without costing you any more.

At the Successful Completion of Your Case

Once you get to the end of your Chapter 13 case by having paid whatever your court-approved payment plan required of you, your second (or third) mortgage lien is stripped off your title. Whatever portion of that mortgage that has not been paid through the Chapter 13 payment plan is then discharged—legally written off. Your home no longer has that mortgage on its title or any of that debt against its equity.

 

Chapter 7 and Chapter 13

September 25th, 2015 at 7:00 am

Sometimes it’s obvious which of the two consumer bankruptcy solutions is right for you. But not always. You might be surprised.

 

7 vs. 13

The two main kinds of consumer bankruptcy are extremely different.

Chapter 7 “straight bankruptcy” usually lasts no more than 3 or 4 months. Chapter 13 “adjustment of debts” is seldom completed in less than 3 years and can last as long as 5 years.

Chapter 7 focuses on the discharge of debts while Chapter 13 on the payment of (special) debts.

Both have trustees involved but in Chapter 7 he or she is a liquidating agent (although usually with nothing to liquidate), while in Chapter 13 he or she is mostly a payment disbursing agent.

Most Chapter 7s don’t have court hearings, nor do they directly involve the assigned bankruptcy judge except behind the scenes and for very specific functions. Chapter 13s generally have at least one court hearing for approval of the payment plan, and sometimes have multiple hearings over the course of a case, although most of the time you don’t need to attend them.

And maybe most importantly, Chapter 7s focus mostly on one moment in time—when your case is filed—while Chapter 13s look at the entire span of years that the payment plan is in effect.

As a result, under Chapter 7 debts are discharged or not, assets are protected or not, and collateral is kept or surrendered. Chapter 13 is much more fluid—debts that can’t be discharged can be handled in many creative and powerful ways, assets that otherwise would be lost can usually be protected, and collateral that would otherwise be taken by the creditor can often be saved or sometimes sold years later.

Obvious or Not?

With such stark differences between these two ways of handling debts, you’d think that picking between them would be easy. Indeed much of the time it is.

You may not lose any assets because they’re all protected through exemptions, most or all of the debts will be discharged, the collateral on secured debts are either “reaffirmed” or surrendered, and the disposable income is not too high for the “means test,”, so everything for you points in favor of Chapter 7.

Or else the opposite is true for you. Some crucial asset is not exempt so it needs further protection, significant debts would not be discharged and need to be paid over time while you are protected from the creditors, a vehicle loan needs to be “crammed down” or a second mortgage needs to be “stripped” from the your home’s title or an income tax lien needs to be valued so that you can pay the tax a minimal amount and have the tax lien released, and/or the disposable income is too high to pass the “means test,” so everything for you points in favor of Chapter 13.

But the stars certainly do not always all align on one side or the other. It can often be a mixed bag.

What if most everything point towards a Chapter 7 case, but you could save hundreds of dollars a month and many tens of thousands of dollars over time with a second mortgage “strip,” which can only be done under Chapter 13? There are numerous possibilities like this.

So even if you went to meet with an attorney thinking you’d file a Chapter 7 simple bankruptcy, it would be wise to keep an open mind in case you learned that you would not qualify for Chapter 7 or that it came with disadvantages, and/or that Chapter 13 gave you big advantages you hadn’t known about.

The Project

So to help you understand what these two procedures can do for you, our next several blog posts will look at different financial problems and how they could be solved (or not solved) under Chapter 7 and under Chapter 13.

We’ll start first with problems about things you own—assets; how Chapter 7 and 13 enable you to keep what you want, and let go of what you don’t want or can’t have.

Then we’ll get into the heart of the matter—debts. How these two procedures handle various kinds of debts, common debts and special ones like various kinds of taxes, child and spousal support, debts voluntarily secured by collateral, and those involuntarily secured through judgment and tax liens and such.  

We’ll finish with problems involving your income and expenses, including how to qualify for each of these procedures, as well as other aspects important for rounding out this comparison between the two.

Please join us on this ride for the next few weeks.

 

Making Sense of Bankruptcy: 5 Powerful Ways Chapter 13 Saves Your Home

August 14th, 2015 at 7:00 am

Chapter 13 “adjustment of debts” provides a set of tools, each one solving a different problem that could otherwise lead to losing your home.

 

Here’s a summary of today’s blog post:

These 5 tools include: 1) being able to catch up on your mortgage arrearage flexibly, 2) “striping” your second (or third) mortgage off your home title, 3) preventing the recording of income tax liens on your home, 4) satisfying already recorded tax liens inexpensively and safely, and 5) slashing other debt obligations so that you can afford to pay debts on your home.

1. Catch up on Past Due Mortgage Payments

You have the length of your Chapter 13 payment plan—generally 3 to 5 years—to pay your missed mortgage payments.

Not only do you have this length of time—much longer than most mortgage lenders would allow voluntarily—you also have a great deal of flexibility in how and when it’s paid during that time. For example, depending on the amount of equity in your home and other factors, you may be able to pay other even more urgent creditors ahead of or at the same time as you’re catching up on the mortgage, such as vehicle and child/spousal support arrearages. You may even be able to catch up through a refinancing, perhaps even after waiting a couple years for more equity to build up in your home.

And this all works because during this entire catch-up period your home is protected from foreclosure and most other collection efforts, as long as you follow the terms of the payment plan that you and your attorney propose and the bankruptcy court approves.  If you do successfully follow your plan, you will be current on your mortgage by the time you finish your case.

2. “Strip” Second Mortgage off Your Title

If your home is worth no more than the balance on your first mortgage, then a second mortgage can be “stripped” of its lien against your home. This means that as soon as your Chapter 13 case were filed, you would no longer need to make the monthly second mortgage payments. That would immediately reduce the monthly cost of keeping your home.

Then the entire balance owed on your second mortgage is treated in your Chapter 13 case like a “general unsecured” debt—just like your lowest priority debts like medical bills and credit cards. This means that the second mortgage balance is lumped in with all of these other debts and then that pool of debt is paid only as much as you can afford to pay during the time that you are in the payment plan. This would be AFTER catching up on your first mortgage and other higher priority debts are paid in full. Often the second mortgage balance and other “general unsecured” debts are paid only pennies on the dollar, and sometimes are even paid nothing. And then at the end of your successful payment plan whatever portion of the second mortgage balance is not paid is permanently written off. That brings you much closer to building equity in your home.

3. Prevent Recording of Income Tax Liens

Filing either a Chapter 7 or Chapter 13 case prevents federal and state income tax liens from attaching to your home while the cases are open. But Chapter 7’s protection lasts only a few months. That means if you owe any income tax that would not be discharged (legally written off) in a Chapter 7 case—usually those from recent tax years—could result in a tax lien being recorded against your home as soon as the Chapter 7 case is over. That’s usually only about three or four months after filing the case. This gives the IRS or other taxing authorities a lot of leverage against you and puts your house in jeopardy.

If instead you file a Chapter 13 case before a tax lien is recorded, the protection against a tax lien lasts for years, giving you time to pay the underlying tax under that protection. The tax would be paid off in your Chapter 13 case as a “priority” debt, usually without any more accruing interest and penalties, and under very flexible terms, without you needing to worry about the IRS/state recording a tax lien throughout that time.

4. Satisfy Recorded Income Tax Liens

If at the time of your Chapter 13 case your home already has an unpaid income tax lien against it, the IRS/state will be stopped from taking any action on that lien against your home. If that lien was recorded on a tax that CANNOT be written off in bankruptcy, Chapter 13 both provides you a mechanism to pay these inescapable debts on a reasonable timetable and protects you and your home while you do so. If that lien was recorded on a tax that CAN be written off in bankruptcy (usually from older tax years), then often you need to pay only pennies on the dollar on that tax before the remaining amount is written off and the tax lien is released.

5. Slash Other Debt Obligations

Chapter 13 reduces what you must pay on your other debt obligations, often radically so. Most debts secured by your home are allowed to be prioritized in your court-approved payment plan, while many other debts are paid less, and in some cases are paid nothing. As a result, you would have much more money to pay your mortgage and property taxes, and perhaps other obligations related to your home.

Chapter 13 can sometimes even give more room in your budget to pay towards your home than if you had filed a Chapter 7 case. That’s because if you owe certain kinds of debts that would not be written off in a Chapter 7 case—such as an ongoing vehicle loan, certain taxes, child or spousal support arrears, and most student loans—Chapter 13 could enable you to pay less each month on those obligations, leaving more money for your home.

 

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