In recent weeks, I have observed attorneys offering bankruptcy services, loan modifications and debt management plans. It is often difficult to decide what is the best option, but not many attorneys are talking about a powerful tool to help debtors: the ability to use bankruptcy to remove a second mortgage.
Under a 1992 decision by the U.S. Supreme Court called Dewsnup v. Timm, lien stripping can only be accomplished in a Chapter 13 bankruptcy. Chapter 13 is designed for people with regular income to pay back a portion of their debts over time.
In the Southern District of California, which covers San Diego County and Imperial County, the process begins by filing a petition for Chapter 13 bankruptcy. The debtors or their attorney also file a plan with the court to repay creditors all or part of the money that is owed to them using future earnings. A repayment plan can be three years or five years, depending on factors such as your income and must be approved before the plan can take effect.
Prior to filing a Chapter 13, the debtors or their attorney should obtain a professional appraisal of their home. In order to remove an unsecured second mortgage, the fair market value of the home must be less than the balance owed on the first mortgage. After filing the Chapter 13 bankruptcy, the attorney will contact the court and obtain a hearing date to request an order removing the lien from the property.
If the court grants the motion, the court will issue an order directing the holder of the second deed of trust to take the necessary steps the remove to the lien from the home. The type of loan does not matter. The bankruptcy court can order the removal of a HELOC, a purchase money loan or any other type of mortgage or other type of lien on the property if it is fully unsecured.
The lien strip only becomes effective once the debtors have completed the payments under their plan. In addition to the removal of the second mortgage, their debts are generally discharged except for domestic support obligations, most student loans, certain taxes, most criminal fines and restitution obligations, certain debts which are not, properly listed in your bankruptcy papers, certain debts for acts that caused death or personal injury and certain long term secured obligations.
If you are in Southern California and would like to see if you qualify for Chapter 13 bankruptcy to remove an unsecured mortgage or other lien from your home, please contact us for a free consultation.
In the Southern District of California, which covers San Diego County and Imperial County, the process begins by filing a petition for Chapter 13 bankruptcy. The debtors or their attorney also file a plan with the court to repay creditors all or part of the money that is owed to them using future earnings. A repayment plan can be three years or five years, depending on factors such as your income and must be approved before the plan can take effect.
Prior to filing a Chapter 13, the debtors or their attorney should obtain a professional appraisal of their home. In order to remove an unsecured second mortgage, the fair market value of the home must be less than the balance owed on the first mortgage. After filing the Chapter 13 bankruptcy, the attorney will contact the court and obtain a hearing date to request an order removing the lien from the property.
If the court grants the motion, the court will issue an order directing the holder of the second deed of trust to take the necessary steps the remove to the lien from the home. The type of loan does not matter. The bankruptcy court can order the removal of a HELOC, a purchase money loan or any other type of mortgage or other type of lien on the property if it is fully unsecured.
The lien strip only becomes effective once the debtors have completed the payments under their plan. In addition to the removal of the second mortgage, their debts are generally discharged except for domestic support obligations, most student loans, certain taxes, most criminal fines and restitution obligations, certain debts which are not, properly listed in your bankruptcy papers, certain debts for acts that caused death or personal injury and certain long term secured obligations.
If you are in Southern California and would like to see if you qualify for Chapter 13 bankruptcy to remove an unsecured mortgage or other lien from your home, please contact us for a free consultation.
About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.
12 comments:
How would you define an unsecured 2nd lien? Wouldn't most 2nd liens be secured unless they were private loans, i.e. a family loan? Thanks for your blog!
If the fair market value of the house is less than the amount owed on the first mortgage, then the second mortgage is unsecured for the purposes of a lien strip in a Chapter 13 bankruptcy. The owner would need to file a Chapter 13 bankruptcy and then initiate legal proceedings within the bankruptcy to have the judge set the value of the property and remove the lien.
i have a scenario for you. i short sale'd rental property that i had a HELOC on. WF (the 2nd TD) approved the SS and agreed to taking $5,000 (total balance was $50k+). now 6 months later i receive a summons saying i'm being sued for the original balance...doh! is chapter 13 too late? are you verse enough in the matter to represent me?
thanks!
In reply to anonymous with the HELOC issue, I seen no reason why you couldn't file bankruptcy now on the debt. The automatic stay would stop the lawsuit immediately and it sounds like a fairly routine issue to me.
Determining your ultimate eligibility would still require a full review of other information such as your assets and income, but you haven't described anything that causes me any concern.
I currently have a first mortgage of 172K and a second of 165K and my value is around 260K -280K. I am having to borrow money from family members to pay for the second mortgage. Can I still file a chapter 13 on some or all of my second to atleast bring down the amount that I owe? If so is this something you can handle?
I have a 1st of 694K, a 2nd of 173K. Have not been late and have not missed payments, been in home since July 06. Tax assessor says value is $493K, zillo range 525K to 565K.
I make around $170K/yr, got separated 6 months ago and feel the sequeeze. This is not sustainable.
Am I a Chapt. 13 candidate?
Thank you.
we bought our house three years ago for 384,000 we have a second on the house that is 76,000 with a ballon payment could we have the second discharged in bk and keep our home the first is not the problem the second is our house is now worth 250,000
A few months ago, my wife and I refinanced our home loan from 5 7/8 to 4 5/8. We also added money to the pot to get it down to conforming. We'll recoup the difference in a few years from the reduced mortgage payment.
We had enough cash on hand to actually pay the house off, but I'm doing way better in the stock market than the 4-5/8's rate we have. Also, we needed the cash to make a down payment on a second home, where my in-laws will be living, and to put enough into a bond fund to make the second home's mortgage payment.
As far as real estate taxes, I voted for Prop 13 in CA umpteen years ago. Its kept our property taxes down, and thus state spending down. Without it, I'm not sure anyone could afford to live in CA. (Renters pay property taxes in the form of higher rents.)
Isn't a Chapter 13 Bankruptcy a negative/adverse item on someone's credit report though? It can adversely affect the Fico score.
Removing a second mortgage through bankruptcy is a very usefull provision allowed by the bankruptcy code, I use it monthly to remove numerous second mortgages on overburdened debtors allowing them to remain in their homes.
In order to remove a second mortgage from your home you must either file a lien stripping motion or adversary case as part of your Chapter 13 plan. Although you must propose it as part of your Chapter 13 plan, you must also file a separate motion or adversary proceeding to have the 2nd mortgage treated as unsecured. In the Central District of California, the bankruptcy court may allow the debtor's testimony and declaration as proof of the value of the property. This avoids the debtor having to pay costs to obtain an appraisal.
I currently have a 1st and 2nd loan on my house. After declaring Bankruptcy i know longer recieved bills from my 2nd mortgage loan. Should i be concerned? my 1st mortage is 160,000 and my 2nd is 40,000, my home is currently worth according to the auditor 165,000.
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