Eliminating 2nd Mortgages Also Called Stripping or Cramming Down

WOULDN’T IT BE NICE TO GET RID OF A 2ND MORTGAGE AND SAVE THOUSANDS OF DOLLARS?

Homeowners  and other property owners often discover that their property’s market  value is less than the balance of the first mortgage. On top of that  many have second mortgages and/or Home Equity Loans.

How do you keep the property and get rid of the 2nd mortgage: the answer may be a Chapter 13.

CHAPTER 13

The  ability to avoid a 2nd mortgage or other junior lien comes when the  market value of the property is less than the senior liens including a  1st mortgage plus accrued and owed real estate tax liens. The same  analysis would apply if there were a 3rd mortgage or IRS lien.

There  are two sections of the Bankruptcy Code that in essence say a junior  mortgage is a secured claim only if after deducting all senior liens  there is still some equity left for the junior mortgage. If the property  has no value beyond the first mortgage, the junior mortgage is no  longer recognized in bankruptcy as being a lien.

An  example: the property has a market value of about $125,000 while the  balance of the 1st mortgage is $137,000. There is a 2nd mortgage with a  balance of over $20,000.

If there is  even $1 of equity for the 2nd mortgages the lien cannot be avoided. So  if the value of home is $140,000 while balance of the first mortgage is  $137,000 the lien cannot be avoided (with one possible exception  discussed below.)

If there is not one  penny of equity in the property the 2nd mortgage can be avoided and its  claim treated as a general unsecured claim. Most unsecured claims are  paid with a very small dividend percentage determined by an individual’s  income.

RECORDING THE RELEASE OF THE MORTGAGE

The  wording of the Bankruptcy Code provided that the Release of the  mortgage can only be recorded upon completion and discharge of the  Chapter 13 case.

PARTIAL EQUITY OF A JUNIOR MORTGAGE

There  is one exception to avoiding a 2nd mortgage where there is some small  equity. If under the terms of the mortgage the final payment is due  within the term of the Chapter 13.

Example:  The mortgage on its own terms is due to expire in 4 years and its  current balance is $12,000. After deducting all senior liens there is  equity of $3,000. A Chapter 13 can be constructed for a term beyond the 4  years to pay the $3,000 in full and the balance of $9,000 to be paid as  a general unsecured claim with, hopefully, a small dividend. The term  of the Chapter 13 must go beyond the 4 year term of the mortgage.

CHAPTER 7

If  you file a Chapter 7 you can get a discharge of your personal liability  on the 2nd mortgage debt but the lien remains on the property. If you  want to save your home and get rid of the 2nd mortgage this is not the  way to go.

CHAPTER 20

There  is no Chapter 20 in the Bankruptcy Code. The term “Chapter 20” is short  hand for a Chapter 13 filed shortly after a discharge in a Chapter 7.

When a Chapter 13 is filed within 4 years of a prior Chapter 7 the Debtor cannot receive a Discharge.

Can you avoid a 2nd mortgage in a “Chapter 20” case?

The majority view is that you cannot as you cannot receive a discharge.

There  is, however, a minority (and I believe better) view that you can. The  reasoning is that the 2nd mortgage debt was discharged in the prior  Chapter 7. Therefore, in the new Chapter 13 the 2nd mortgage is not a  secured claim.

Christine Adams of our  firm successfully litigated this issue in a Lake County case called  Anderson v. Harris Bank. Christine persuaded the judge to rule that a  debtor may strip a wholly unsecured lien in a Chapter 13 where no  discharge is available. The unpublished decision was entered by A.  Benjamin Goldgar in the United States Bankruptcy Court in the Northern  District of Illinois. Other judges are following this reasoning but as  yet it is not universal.

TAKE ACTION

In  this day in age many homeowners are saddled with “underwater”  2nd mortgages. For a more in depth analysis about saving your home and  getting rid of a 2nd mortgage call us. Our consultations are  Complimentary and confidential.

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