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Archive for the ‘Chapter 13’ Category

Second Mortgage Shuffle

Wednesday, November 17th, 2010

Bankruptcy contains a little bit of magic in the form of a second mortgage lien strip.  If you qualify, the bankruptcy laws allow you to keep your home with just the first mortgage.  The second mortgage payment hits the garbage bin.  We have seen seconds of over $250,000 stripped away inside a Chapter 13.  The simple criteria are that (i) your house is upside down taking into account just the first mortgage; and (ii) you have steady sufficient income.

Contact Doan Law Firm to see if a mortgage lien strip is in your future.

Back Taxes Meet a Chapter 13 Plan

Monday, June 7th, 2010

In the context of a Los Angeles Chapter 13 bankruptcy, if the State or IRS voluntarily submits a proof of claim for tax liability to the court, the claim will become part of your bankruptcy.  If your bankruptcy is paying a percentage to unsecured creditors (like credit cards), then it would be beneficial to pay the claim through your bankruptcy plan as it would not increase your overall Chapter 13 plan payment amount.  A portion of each payment is directed towards the taxes and by the end of the plan the taxes are paid in full.

It is unclear that when applying for payment arrangement with the State and/or IRS whether they will choose to set up a separate repayment plan or submit a bankruptcy proof of claim.  Most likely they will default towards setting up a separate repayment plan.

As always, please check with your attorney and let them know what kind of payment arrangement the IRS and State is proposing before making any payments.  We will explore your option of claiming the current tax liability in your existing Chapter 13 bankruptcy plan once we know the IRS and/or State’s course of action.

Chapter 13 – A Viable Loan Modification for Your Second Residence

Tuesday, May 11th, 2010

Another Installment of “Ask Doan Law Firm

Q: I was reading in the newspaper that when you file for a chapter 13, you can also request to modify your 1st mortgage to the current value of the house.  Is this correct?

A: The bankruptcy code specifically prohibits modification of a mortgage on a primary residence.  A mortgage on a secondary residence may be modified. The way the modification works is that the court may “cram-down” the principal amount of a mortgage on a property to its market value.  However, the court’s ability to do this only lasts for the duration of the bankruptcy so the entire market value of the home must be paid during the course of the bankruptcy so that the court may “finalize” the loan modification before the bankruptcy ends. It is based on the same code provisions that allow a bankruptcy court to determine that secondary (and tertiary, etc) trust deeds on a property are completely unsecured by any residual value in a property after considering the first trust deed (primary mortgage) and current fair market value, which results in the court’s ability to grant the lien strips.

Thus, if the “non-primary residence” property has a market value of $200K, then you must pay $200K in the course of about 3-5 years (i.e. about $3,667 per month) in addition to any other amounts required by your bankruptcy plan. In addition, depending on your county, the Trustee may decide not to let this come at the expense of your unsecured creditors… therefore it effectively cannot be your own money that pays this monthly amount (you will need a renter) or you will also need to pay off an equivalent amount of your unsecured creditors.

Practically speaking, cramdowns on mortgages only occur when the property value is very low.

Previously, the bankruptcy court did have the power to modify mortgages on primary residences. Congress explicitly removed this power and as of the last Bankruptcy Code revision has not reinstated it. There was legislation last year regarding reinstating this power of the court, but it was contained in a broader bill rejected by the US Senate.  Currently to the best of my knowledge the legislation has not been reintroduced.

Keeping Your House Through Mortgage Lien Stripping

Tuesday, March 16th, 2010

Mortgage stripping is not well known outside of the bankruptcy community, but it is a highly useful mechanism that can help a debtor to keep her home without paying second mortgages or liens. When a second mortgage or other lien is wholly unsecured, bankruptcy law allows it to be stripped away and treated like an unsecured debt – like a credit card or medical bill – and paid pro rata with the other unsecured debt instead of being paid off in full. For most people in bankruptcy, this means that you can pay your second mortgage off for pennies on the dollar, provided that you meet certain qualifications.

Mortgage lien stripping is most often done in association with a foreclosure, but you don’t have to be in foreclosure or even in distress to take advantage of this remedy. You do have to file a Chapter 13 Bankruptcy, though, which means that you will have to submit a payment plan to repay part of your debts. The amount you pay varies but is tied to your disposable income – your ability to pay. Lien stripping is not available outside of bankruptcy or though the Chapter 7 liquidation process.

I believe that mortgage lien stripping is necessary more often than lots of people like to admit. Some people don’t want to file bankruptcy, or don’t want to deal with the problems they face. Perhaps it’s easier just to keep making the payments. And that’s fine. But I question whether you want to keep paying a first, and second, and sometimes third mortgage where you have no hope of paying it off and where there will be no value in it

for years, if ever. I don’t see a point in paying mortgages that are double what the house next door rents for when the homeowner isn’t gaining any equity and is stretches as far as she can go just to stay afloat. We can do better for you.

Some of my clients have told me that they “feel bad” about agreeing to pay and then not following through. I point out to them that they bank doesn’t feel bad when they kick up your interest rates. The bank doesn’t feel bad when it forecloses. And the bank doesn’t feel bad when they screw up so badly that the government has to bail them out. The bank even has an advantage over most consumers – knowledge – and were still knocked down

by our real estate bubble. If your lender is going to take advantage of all remedies at its disposal – and then additional remedies created after the fact for them by a pliant Congress – then, as I see it, so should you.

Remember, you can stop a foreclosure by filing bankruptcy at any time before the foreclosure sale – even after judgment is entered.

Mortgage lien stripping was seldom seen in bankruptcy before the economic downturn. This is because the mortgage(s) to be stripped must be “wholly unsecured.” For example, if you bought a house for $200,000 with 80/20 financing, you have a mortgage for about $160,000 and another for $40,000. If your property dropped in value to $150,000, your first mortgage is mostly secured but second mortgage is now wholly unsecured and can

be stripped. The second mortgage is secured on paper, but in practical terms the sale of the home would not pay a penny to the second mortgage, and as a result it is seen an unsecured in bankruptcy. In a market with accelerating home values, this neverhappened: in fact, one could simply sell the home at a higher price to the next seller, pay the mortgages, and profit. Obviously, this is not the case today.

Fortunately, that does not mean that all is lost. If you own real estate with a second or other mortgage or lien after your first, it may be possible to remove that lien in a Chapter 13 Bankruptcy Case. By doing so, you can change your mortgage payment from a sketchy proposition and questionable investment into the good investment you had always thought it would be.

There are also several other ways to avoid second mortgages in Bankruptcy. A debtor can strip a lien when:

  • The second mortgage is wholly unsecured, which is the most common occurrence today and was discussed above;
  • There is a balloon payment due on the mortgage during the life of the Chapter 13 case;
  • The second mortgage is secured by other assets in addition to the house; or
  • The property is not the “debtor’s principal residence.”

Generally speaking, debtors leave bankruptcy and the mortgage lien stripping process without a second mortgage, with their home, and with a more affordable mortgage payment. Of course, if you can’t afford your first mortgage payment by itself, you may still have a problem – you will probably want to consider surrendering your home and using the Chapter 7 liquidation process instead – but for a lot of debtors mortgage lien stripping can be highly useful and effective.

Instead of, or before, you decide to do nothing and just surrender your real estate back to your lender, consider discussing this option with an attorney who works with these issues. Doan Law Firm, your bankruptcy attorneys in Orange County, Riverside and Los Angeles Counties, offer a free 45 minute consultation and would be happy to assist you in these matters.

Why Attorneys Don’t Always Sign Reaffirmation Agreements On Behalf Of Their Clients.

Friday, December 11th, 2009

Let’s first start with what happens when a debtor files for and is granted a discharge in a Chapter 7 case. In this instance all dischargeable contracts become null and void and any remaining claims on these contracts are no longer the debtor’s legal responsibility. However, a debtor may choose to keep some of his contractual obligations after the filing of a Chapter 7 bankruptcy. Enter reaffirmation agreements:

11 U.S.C. § 524.

“(c) An agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title is enforceable only to any extent enforceable under applicable nonbankruptcy law, whether or not discharge of such debt is waived, only if–

(3) such agreement has been filed with the court and, if applicable, accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement under this subsection, which states that–

(A) such agreement represents a fully informed and voluntary agreement by the debtor;

(B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and

(C) the attorney fully advised the debtor of the legal effect and consequences of–

(i) an agreement of the kind specified in this subsection; and

(ii) any default under such an agreement;”

In essence, Section 524(c)(3) speaks of reaffirming or (reviving dead contracts after filing a bankruptcy on things debtors want to keep and continue to pay for).

(more…)

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