Chapter 7 and Your 2nd Mortgage

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.

2nd Mortgages or Home Equity Line of Credit, Heloc

has two things over you

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

Bankruptcy Chapter 7 Discharges the Note or the Loan, but you still have the Lien called a Trust Deed on your house.  Your 2nd mortgage lender can foreclose the lien, but in order to do so, it must pay off the 1st mortgage and any unpaid property taxes first.

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.

Offer to Settle Your 2nd Mortgage

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.

2 Responses to Chapter 7 and Your 2nd Mortgage

  1. Catherine Olszanowski says:

    How do I put off paying my mortgage payment month to month? Also, I will be receiving a trustee sale date next month, what can I do to put that off for another month?

    • Administrator says:

      I think your questions sound like loan modification questions rather than bankruptcy questions. Bankruptcy stops foreclosure. However, if you’re not a position to pay the regular monthly payment on the mortgage then a chapter 13 won’t work for you. If you can make the regular payment on the mortgage but you’re still behind several months, you would have to be able to pay the arrears off over a 60 month period.

      That number will be higher than you think it is because there are going to be foreclosure fees, attorney’s fees, bankruptcy trustee’s fees all added onto the monthly payment. If you can pay that payment in addition to the regular mortgage payment, then you can keep your house.

      If you can’t make the mortgage payment or you can’t make the additional chapter 13 plan payment against the arrears, then a chapter 7 will also stop the foreclosure but only for a while. It could give you the time you need to complete a loan modification or a short sale.

      If you’re just interested in how can you stay there for two years free. I don’t know. Good luck.

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