Stripping 2nd & 3rd mortgages in Ch 13

[LadynRed]

Excellent article about stripping away 2nd and 3rd mortgages in a Ch 13

http://www.bankruptcylawnetwork.com/...ter-13-filing/

[Worried]

I was a little confused on the part at the end when it said if your 1st mortgage was not what the house is worth..did they mean the 2nd one? We owe 172,000.00 on first and 56,000.00 on second but house is only worth maybe with the market 200,000.00.

Plus, we have been in a 13 for the last six months, is it too late to do anything about this? Our second's interest rate is 12.99% we are still hurting.

[LadynRed]

What it means is if your house isn't worth what you owe on the FIRST mortgage, then there is no equity to guarantee the 2nd, and that means that loan could be stripped.

Talk to your attorney, you might just be able to strip off that 2nd.

[debttaxguy]

Ask your attorney if the lenders have filed a proof of claim in the case. A lot of times you don't see these because they are filed with the Court and a copy is sent to the attorney. Initially in the petition you state in the chapter 13 plan if the lender is both secured and unsecured as a creditor. The creditor then files a POC that states what they think is secured or unsecured. If you disagree then you file an objection to the proof of claim and the Judge has a hearing on it. If the creditor does not file a proof of claim in a chapter 13 then you valuation in your petition takes precedent.

[jq26]

Interesting take on this. Seems to fly in the face of both the intent and the language of 1322(b)(2). I see how they are arguing that the lack of any remaining equity negates the secured claim and puts it into the unsecured column, allowing it to be stripped. But I don't think that was the intent. I'll have to research this. This would allow many to strip liens and keep their homes if 1322(b)(2) is being construed like this in all circuits.
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This is definitely valid. If a lien is wholly unsecured at the time of filing a Chapter 13, the lienholder is treated as unsecured creditor, thus the loan is modifiable. The plan should contain a repayment of the lienholder's claim at an identical rate as other unsecured creditors. Upon completion of the plan, the lien should be stripped. The Nobelman Supreme Court decision "strongly suggested this concept".

If a lienholder's claim is partially secured, even in the tiniest amount, then the repayment plan cannot be confirmed by the court if any portion of the lienholder's claim is modified. Thus, no stripping or cramdown whatsoever. The Nobelman Supreme Court decision spoke directly to this issue.

The Nobelman concept has come back down and has been interpreted in many circuits:
1st Cir: In re Pelosi, 382 B.R. 582
2nd Cir: Pond v. Farm Spe******t Realty (In re Pond), 252 F.3d 122
3rd Cir: McDonald v. Master Fin., Inc. (In re McDonald), 205 F.3d 606
4th Cir: Weekly v. Bank One Wheeling-Stubenville, N.A. (In re Weekly), 2008 Bankr. LEXIS 1153, Case No. 06-1121
5th Cir: Bartee v. Tara Colony Homeowners Ass'n (In re Bartee), 212 F.3d 277
6th Cir: Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663
9th Cir: Lam v. Investors Thrift (In re Lam), 211 B.R. 36
11th Cir: Tanner v. FirstPlus Fin., Inc. (In re Tanner), 217 F.3d 1357

[jq26]

Weekly v. Bank One Wheeling-Stubenville, N.A. (In re Weekly), 2008 Bankr. LEXIS 1153, Case No. 06-1121:
."..While Congress has prohibited Chapter 13 debtors from "cramming down" the secured portion of a mortgage debt on a debtor's principal residence to the value of the collateral, no similar prohibition exists preventing the "strip off" of liens that are wholly in excess of the value of the collateral. E.g., 11 U.S.C. § 1322(b)(2) (prohibiting the modification of claims "secured" by the debtor's principal residence); Bartee v. Tara Colony Homeowners Ass'n (In re Bartee), 212 F.3d 277 (5th Cir. 2000) (holding that § 1322(b)(2) prohibits "cram down," but not "strip off"), In layman's terms, a "cram down" can occur when the value of the collateral (for example, $ 50,000) is less than the outstanding balance on the debt secured by the collateral (for instance, $ 70,000). In a "cram down" scenario, the debtor can treat $ 50,000 of the debt as secured, and the remaining $ 20,000 as an unsecured debt. By comparison, a "strip off" can occur when there is $0 of the collateral's value securing a debt. In the above scenario, if the debtor borrowed an additional $ 10,000 and granted a second, junior security interest in the collateral, then no money would be available to the second creditor in the event the collateral was liquidated to payoff the first creditor. Under this latter example, the debtor can treat the entire debt owed to the second creditor as unsecured in bankruptcy.

The conclusion that wholly unsecured liens on a debtor's principal residence can be "stripped off" in a Chapter 13 plan -- while the unsecured portion of a partially secured claims cannot -- is the product of two Bankruptcy Code sections and a decision by the United States Supreme Court. Section 1322(b)(2) of the Bankruptcy Code allows a Chapter 13 debtor to "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. Determining whether a creditor is "secured" in property, § 506(a) directs that a creditor only has "a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property …." Any amount in excess of that value is an unsecured claim. In Nobelman v. Am. Sav. Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993), the Supreme Court addressed the implications of §§ 1322(b)(2) and 506(a) regarding a first mortgage creditor that was only partially secured by the debtor's principal residence -- the "cram down" scenario. The Court determined that the mortgage creditor was still the holder of a "secured claim," as contemplated by § 1322(b)(2), even though a portion of the "secured claim" was not supported by the valuation of the collateral. 508 U.S. 324 at 328-32.

On the other hand, if no portion of the secured creditor's claim is secured by the value of the collateral then Nobleman would not apply because no portion of the debt is "secured" by the value of the collateral. Nobleman's "antimodification exception is only triggered where there is sufficient value in the underlying collateral to cover some portion of the creditor's claim." Pond v. Farm Spe******t Realty (In re Pond), 252 F.3d 122, 125 (2d Cir. 2001). Indeed, the Court in Nobleman, 508 U.S. at 328, stated that the debtor was "correct in looking to § 506(a) for a judicial valuation of the collateral to determine the status of the bank's secured claim."

[jq26]

As I think about this more, one curious result seems to plague the Nobleman interpretation of 1322(b) and 506(a).

The allowance of lien stripping only in the case of wholly unsecured lenders means that borrowers who took out higher risk piggyback loans are at an advantage to the borrower who takes on one loan.

Example:
Borrower 1 buys home worth 100k in 2004 with an 80k 6% first loan with a 20k 8.5% loan in second position (not atypical). The home loses 30% of its value by 2008- now worth $70k. Borrower files 13. Loan #2 is deemed unsecured upon a showing of proof of FMV of the home and the lien is stripped. Borrower 1 makes full payments on the $80k loan plus arrearage but only makes payments on loan #2 at the unsecured % rate. Borrower 1 exits Chapter 13 with a lien on the home equal to the remaining principal on the $80k loan only.

Borrower 2 buys a home worth 100k in 2004 with a 100k 6.5% loan with monthly MI. The home loses 30% of its value- now worth $70k. Borrower files 13. The loan cannot be crammed down nor stripped because at least a portion of the loan is secured. The borrower makes full payments on the full $100k loan amount plus cures arrearage on the entire $100k loan. Borrower 2 exits Chapter 13 with a lien on the home equal to the remaining principal on the $100k loan.

This seems odd to me. We have similarly situated bankruptcy filers that receive different treatment and a different end result. Please post if I am missing something here.

[bingo]

Thank you for taking the time to post all of those cases and the explanation. I'm sure this will help many people.

[OMGWhatHaveIdone]

Originally Posted by jq26

Interesting take on this. Seems to fly in the face of both the intent and the language of 1322(b)(2). I see how they are arguing that the lack of any remaining equity negates the secured claim and puts it into the unsecured column, allowing it to be stripped. But I don't think that was the intent. I'll have to research this. This would allow many to strip liens and keep their homes if 1322(b)(2) is being construed like this in all circuits.
---------------------------------------------
This is definitely valid. If a lien is wholly unsecured at the time of filing a Chapter 13, the lienholder is treated as unsecured creditor, thus the loan is modifiable. The plan should contain a repayment of the lienholder's claim at an identical rate as other unsecured creditors. Upon completion of the plan, the lien should be stripped.

If a lienholder's claim is partially secured, even in the tiniest amount, then the repayment plan cannot be confirmed by the court if any portion of the lienholder's claim is modified. Thus, no stripping or cramdown whatsoever. The Nobelman Supreme Court decision spoke directly to this issue.

Okay, so what does this mean in layman's terms?

Here's the scenario: I know... it's long.. just bear with me please while I get it all out.

1. I have a USDA loan for my house - 1st mtg - secured loan.
2. December of 2007, I received my act 91 notice (in PA only) that the USDA was going to foreclose on my home unless I acted.
3. I immediately filed an appeal to the foreclosure, which put an automatic stop on fc procedures and ALL activity from the date they received my written appeal.
4. I received notice that the automatic stop (or stay) was in place while my case was going through the process of appeal. During this time, I was NOT allowed to make any mtg payments or pay on any part of the arrears until after the Appeal hearing. Because of this stop, no further activity on my loan was to take place. I have this in writing from them.
5. In Feb. 2008, because I didn't think I would win my appeal, a ch 13 was filed to prevent the foreclosure on the house. This was filed the same week that I filed my 2007 tax returns. I anticipated a refund and thus, was supposed to give my atty a retainer from my returns. I listed the house on my ch 13 and we called the USDA to get the exact amount I was in arrears by. We used that amount on the ch 13.
6. I get a letter from the Treasury Dept the very next week, stating that the USDA had intercepted my tax refund from the IRS, claiming that they had a right to collect on the arrears on my mtg. I took this promptly to my attorney. I also showed him my notice of the automatic stop from the USDA which proved that there was not going to be any further activity on my loan due to the appeal still going on.

Between my attorney and the USDA's legal department, they battled this out for over a month because it was our contention that the USDA had no right to intercept my refund due to the stop/stay clause stemming from not only the appeal that was filed against the foreclosure, but because of the ch 13 that was filed as well, and the rules about stay of execution that are *supposed* to apply under the rules of a ch 13. The USDA's contention was that because they are a government agency, and the IRS is a govt agency, that "one hand washes the other" and they had a right to intercept. It was also stated that they (USDA) don't have to abide by the same rules as a conventional mortgagor. So we finally came to an agreement of them keeping half my refund and issuing a check to me for the other half. They had held onto my refund for a month and a half before releasing a check to me in April.

7. Because of the amount of arrears that we initially used in Feb when the ch 13 was filed, and the amount that was kept from the interception, we had to re-file the payment plan based on the $1000 difference.

So..... if you got this far, I love you for having the patience to put up with all that..... and my question now is this:

based on the information above:
1. knowing that the loan was a secured loan and;
2. the bk was filed PRIOR to the IRS intercept and;
3. the amount of the USDA's *claim* as filed on the ch 13, had to be modified due to the IRS intercept.

Does this mean that my mortgage is now allowed to be stripped or considered as "unsecured"? If so, does this mean that my entire mortgage can be written off under my ch 13, allowing me to be free from repayment, and keep my house at the same time?
I'm probably not wording that right, but perhaps someone can shed some light by looking at the steps in the scenario and tell me if I have cause to keep my house free and clear because of the USDA's screw up of intercepting my tax refund after the ch 13 was already filed.

[Anaice]

Although it has been some time since this posting I am still very curious, would this petain to an equity line of credit too or is this just for 2nd mortgages?

[Anaice]

Would this apply to an equity line of credit?

[Denita]

Yes, a home equity line of credit, also known as an HELOC, is considered a 'junior lien' to your first mortgage (usually). In a Ch 13, If the value of your home is less than the outstanding first mortgage, you can strip the junior liens which include a HELOC. There is a proceedure to follow right in the code for a proper lien strip.

Because of the current state of the market there are some people that are attempting the same thing in a Ch 7 - but it is not an official strip the way a Ch 13 handles it.

It's an 'unofficial lien strip' where your home's value is less than the first (that part is the same), you are current on the first mortgage, have been discharged from Ch 7 but you have also simultaneously stopped paying on your second mtg (or HELOC). Once you are behind a bit - say 3 or more months or so, then you offer to pay a very small percentage to the lienholder to release the lien (like 5% or 10% of the lien). This would be an exchange - you exchange the reduced 'payoff' and they sign the release.

[Anaice]

Thank you, this helps : )

[Anaice]

What happens if I stop paying my credit cards, would my husband be responsible for them even though he is not a co-signer? I lost my business and it really has nothing to do with him. He is not on any of my business papers, etc. He is an authorized user on only one card. I am in the process of filing Chapter 13 but I can not file yet until my home sells. I just can not keep up with the bills. We have never been late ever but unfortunatelly things did not work out. Now I am afraid that his credit could suffer. Thank you in advance....

[Anaice]

Can credit card companies come after you or take you to court for not paying your credit cards?

[CarolinaBlueEyes]

Ana

you might want to start a new thread in the credit forum since this is another topic. Short answer, yes you can be taken to court. No they can not sue your husband if he is not on the card

[VictorSinclair]

Originally Posted by Denita

Because of the current state of the market there are some people that are attempting the same thing in a Ch 7 - but it is not an official strip the way a Ch 13 handles it.

It's an 'unofficial lien strip' where your home's value is less than the first (that part is the same), you are current on the first mortgage, have been discharged from Ch 7 but you have also simultaneously stopped paying on your second mtg (or HELOC). Once you are behind a bit - say 3 or more months or so, then you offer to pay a very small percentage to the lienholder to release the lien (like 5% or 10% of the lien). This would be an exchange - you exchange the reduced 'payoff' and they sign the release.

Is there any more info available on this strategy? Has anyone recently had success with stripping a heloc in this way? I ask, because my wife is contemplating a chapter 7. She has in her name a heloc of $115K with a 1st of $170K plus $25K in credit card debt. I would have suggested going with the official route of stripping the second in ch 13 since paying 5%-10% of $115K is not possible for her. Problem though is I believe one has to be able to make some payments as opposed to her being unable to make any further payments. Any suggestions on which way to go with her BK?