A Chapter 13 Bankruptcy can 'strip down' (get rid of) your second mortgage, including the one on your primary residence.
While Congress and the White House wrestle with just how to stem the relentless tide of housing depreciation, we thought you might like a word or two on how you can 'strip' your second mortgage if you have one.
During the 2002 to 2008 run-up in residential house prices, many of us got 80/20 loans with no or little money paid down.
Now as house prices barrel down the hillside along with the value of the stock market, your 401K, and just about everything else you bought since 1993, take comfort, that if you have to file bankruptcy, even if congress gets its usual case of 'Nero' (Fiddling around while the world economy burns) you can cram down or strip away your second mortgage. The bank may call the second 'secure' but it's not really.
If you are insolvent (your monthly out-go is more than your monthly in-flow) and you are 'upside down' or underwater in your house (you owe more than it's worth in today's market), a Chapter 13 plan may even now allow you to get rid of that second mortgage and stay in your house. A little bit of good news for the cash strapped. A bailout, a golden parachute for those of us who didn't drive a major bank into a ditch. Isn't that nice?
We can 'Cram Down' second mortgages using the old Bankruptcy code section 1322 which states:
'Contents of plan
(b) The plan may:
(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.
That's legalese which teaches us that a loan is not 'secured' by your personal residence if there is no value or equity in your home that would go to the lender if the home was sold. In such a case a loan can be converted to unsecured or the lien 'stripped' from the house by 'modifying the rights of holders of secured claims. This, in turn makes it unsecured debt, like credit card debt, which can be discharged in bankruptcy.
We here at David Otto and Affiliates, PC and the Bankruptcy Court, are cramming down the second mortgage to unsecured status.
For instance: Let' s say you bought your house in 2006 for $500k with 100% financing using an 80/20 loan. In that case, your first mortgage is 80% or $400k and your second mortgage is 20% or $100k. The market here in Las Vegas and elsewhere is down more than 20% from its peak and your house is now only worth $375k. This means if the house were to be sold, the first mortgage would take every penny of the $375,000 if it could get it, and the second mortgage would get nothing, zilch. In this scenario, the second mortgage is 'wholly unsecured' and the second clause of section 1322(b) of the bankruptcy code, does not apply, so we can modify the rights of the second mortgage holder and turn it into unsecured debt.
Now, you rightly ask: what happens to the now unsecured stripped off second mortgage? It gets paid in your Chapter 13 plan but only after your other secured debts are paid. Secured debts are the first mortgage, your property taxes, and your car payments. And because a Chapter 13 plan lasts only 3-5 years (usually 5) a whole lot of that unsecured debt does not get paid. At the end of 5 years, most unsecured debts (excepting of course, student loans, back income taxes, or family support payments) are discharged so you don't have to repay them.
At the end of 5 years, you are left with just your just mortgage payment on your house. Your cars and your back property taxes are paid off, your student loans and back income taxes are paid down, but your second mortgage and your credit card debt is gone! Beautiful isn't it? I knew there was a reason I loved that 80/20. It just keeps on giving.
A Chapter 13 plan is something like debt consolidation which is done with the help of the bankruptcy court. A Chapter 13 plan lasts 3 to 5 years (usually 5) during which you pay off the debt which the court determines you can pay. The Chapter 13 plan can include student loans and back income taxes.
Of course it's not all roses and lollipops. To start with, you'll have gone Bankrupt. The credit bureaus may report that for 7 years and it will appear as a public record for 10 years on your credit report. Creditors do not really distinguish between a Chapter 7 or a Chapter 13 bankruptcy. Your credit will take a pounding. But if you simply don't pay your debts, if there are court judgments to collect debts, if you do nothing, your credit will likely take a beating anyway, so it's not really any worse. And because the Bankruptcy gives you a fresh start, your credit might even be better as a result.
Sad to say, but you must make every plan payment for 3 to 5 years. If you fail to make even one plan payment, everything goes back to the way it was before you filed for bankruptcy. You owe all that debt, and the second lien is no longer stripped off. So we advise our clients to make a budget that will work for 5 years, not just one that looks good to the Bankruptcy Court.
So, there really is something you can do about foreclosure you can stop it.
If you want more information, or if you want to file a Bankruptcy, call the Law Offices of David Otto & Affiliates, PC - or click on the contact button to the left and send us an email. Tell us a bit of your story. We'll call you.
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michael diaz
