Chapter 13 & Your 2nd Mortgage or HELOC
By Mark Reed
Jun. 4, 2014 4:37p
Chapter 13 and Your 2nd Mortgage or HELOC
You may be able to strip your 2nd mortgage or home equity line of credit, Heloc, off of your home in a Chapter 13. Not only can you discharge the loan, or promissory note that you signed, but you may also be able to remove the lien as well. If the Bankruptcy Judge assigned to your case agrees, then once your chapter 13 case is over, the creditor must release the lien.
You may also be able to remove the 2nd mortgage from a rental property and in addition, you may also be able to reduce the 1st mortgage as well. Rental properties have different rules than residences do. An important distinction, you must remember that if you live in the house, you have fewer options than if you have moved out and rented the place.
IT WORKS PRETTY MUCH LIKE THIS:
A 2nd mortgage, or home equity line of credit, 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
Chapter 7 Bankruptcy discharges the Note or the Loan, but you still have the Lien or Trust Deed on your house. Even after your bankruptcy, your 2nd mortgage lender can foreclose the lien, but in order to do so, it must first pay off the 1st mortgage and any unpaid property taxes.
This is a big difference between the two chapters of Consumer Bankruptcy. After a chapter 7 is over and completed, the 2nd mortgage could still foreclose on the house later. Over time, the value of the property will go up. The house will appreciate. After it's value increases to a point where the value of the house is greater than the balance on the first mortgage, the 2nd mortgage would be in a position to foreclose the property.
So, what you do is:
1. Get an appraisal. We must be able to credibly state that the value of the home is significantly lower than the balance on the 1st mortgage. If your value is lower but close, you run the risk of expensive litigation in order to strip your 2nd mortgage or home equity line of credit. Of course, if the balance on the 2nd is large compared to the cost of the litigation, then it's worth the effort. As long as you know that the attorney's fees could be significant as you're going into the deal, then it's fine if you want to spend the money. Nevertheless, those attorney's fees would be on a three to five year payment plan so it should be manageable.
2. If the value of the home is lower than the balance on the first and it is significantly lower, then the mortgage lender on the 2nd mortgage or Heloc, Home Equity Line of Credit, won't fight it, and you'll win by default.
3. If the value of your personal residence, or the home you live in, is greater than the balance on the first, even just a little bit, then you lose and you're stuck with the whole 2nd mortgage. If the value of the personal residence is only a bit lower than the balance on the 1st mortgage, then expect to have a sort of mini-trial on the value of the home. If the balance on the 2nd mortgage is not very much it may be a better option in the long run to just keep paying it. If it's only $15,000 and you got to upgrade your windows, if may cost you nearly half that to get rid of it. But you'd have to pay that half, i.e. the attorney's fees into your bankruptcy payment plan. If your plan payment is tight already it may be worth it to rethink trying to strip the 2nd mortgage.
4. Remember however, there is a difference between your primary residence and your rental properties. Respecting your primary residence, you can only remove your 2nd mortgage, or not. Rental properties however, can have 2nd mortgages removed or reduced, and 1st mortgages can also be reduced so that the total balance of all the mortgages is equal to the value of the rental property. This is also possible in a Chapter 11.
Chapter 7s are risky.
We don't know how long it will take the values of our real estate to increase. At this writing in June of 2013, home values are starting to bounce back. If you do a chapter 7, you will discharge the loan, or promissory note. Nevertheless, you will still have the deed of trust still attached to the house. So at some point you must settle that 2nd mortgage with that bank.
Chapter 13s are risky too.
They can allow you to strip the 2nd mortgage off the house completely. Risky because chapter 13 (on your primary residence) requires that you immediately go back to paying your regularly scheduled monthly mortgage payments on your 1st. If the 1st mortgage has not yet been modified on the date of filing the bankruptcy, then you'd be stuck with the unmodified mortgage payments.
All chapter 13s must be approved by the judge assigned to your case. Called a confirmation order, many cases end up falling short because people who want to remove the 2nd mortgage often propose payment plans that are unrealistic. In other words the budgets they propose for themselves are just too tight. Your attorney will refer to such a budget as unfeasible. Feasibility just means that you really can afford to make the monthly payment to the bankruptcy trustee on your case. To be confirmed, a case must be feasible, and you must convince your judge and your bankruptcy trustee that you can afford to to make the chapter 13 plan payments.
Additionally, most chapter 13s never get completed once they are confirmed. 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 just a busted transmission that you don't have any money to fix without using your plan payments. If your plan payment is diverted because either your earning capacity has been reduced or your ability to pay has been eclipsed by a more pressing expense, then your case will be dismissed.
Stripping the 2nd mortgage off in a chapter 13 requires that you complete the payment plan. If your hypothetical plan payment is $350/mo and you pay it for 2 1/2 years that's a total of $350 x 30 months = $10,500. What if you cannot pay it anymore because of a work stoppage, you get fired or laid off, you break your leg, your transmission goes bad? You're not going to complete your chapter 13 payment plan. Guess what, you just tossed $10,500 out the window.
So, to Strip a 2nd mortgage off of your primary residence,
the value of the property must be lower than the balance on your first mortgage
you must be able to pay the 1st mortgage payment,
you must get the judge to agree that you are able to afford the plan payment,
and you must complete the plan which will be 3 to 5 years long.
How Much Will My Chapter 13 Plan Payment Be?
Chapter 13 Plan Payments depend on a few things
1. how much excess income you have at the end of the month
2. how much the means test says you must pay
3. how much you owe on unpaid mortgage payments from previously unpaid months called arrears
4. back taxes and child support
5. the balance owing on your car
6. how much of your attorney's fees were paid in advance
7. how much you usually get as tax refunds, and,
8. several other possible issues
You will have to call for a consultation on the issue in order to get an estimate. Call Now to set an Appointment for a free consultation, Call 858-277-0232.