Question: I own a home that has declined in value and is now worth $515,000. I have a first mortgage in the amount of $480,000, a second mortgage in the amount of $50,000, and a third mortgage in the amount of $35,000. I want to keep my home. Is it possible, through bankruptcy, to eliminate my second and third mortgages since the house is worth less than I owe?
Answer:
The third mortgage can likely be eliminated, but not the second mortgage.
In bankruptcy, money that is owed to a creditor may be either an unsecured claim or a secured claim. Credit card debt is mostly unsecured claims. Debt for the purchase of a home or a vehicle is usually secured by a lien on the real estate or personal property, and thus is secured claims. Section 506(d) of the Bankruptcy Code states that “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void…” So a lien on a credit card debt would be void; a lien on your home would not normally be void.
However, a creditor’s interest is secured only to the value of that interest in the property. It is unsecured to the remainder of the creditor’s interest. In the example, the first mortgage in the amount of $480,000 is completely secured because the value of the real estate exceeds the first mortgage. However, after the first mortgage is paid, there will remain only $35,000 for the second mortgage. This $35,000 will be the secured claim of the second mortgagee who will also have a $15,000 unsecured claim. The entire $35,000 third mortgage will be unsecured.
In 1992, the U. S. Supreme Court ruled that a Chapter 7 debtor cannot use Section 506(d) to avoid a lien on real property.[Footnote 1] Section 1322(b) of the Bankruptcy Code further protects mortgage lenders by disallowing a Chapter 13 debtor from modifying the rights of holders of claims secured by interests in real property that is the debtor’s principal residence. However, courts have ruled that Section 1322(b) does not prevent a Chapter 13 plan from modifying “wholly unsecured debts.”[Footnote 2] In the example, the second mortgage is partially secured so it cannot be modified. The third mortgage is “wholly unsecured” and can be listed on the Chapter 13 plan as an unsecured debt.
After a Chapter 13 plan has been confirmed, the debtor can convert the case to a Chapter 7 filing. Under Chapter 7, the unsecured debt can be discharged. The third mortgage would then be eliminated, but the first and second mortgages would continue as before. Eliminating the third mortgage seems fair, in this instance, since the mortgagee would receive nothing in the event of foreclosure. The restrictions on loan modification for loans secured by real property that is the debtor’s principal residence serves to increase the availability of home loans by offering some assurance to the lender that they will be repaid. It was not the intent of Congress to offer the same assurance to other lenders who supply funds for debt consolidation or home improvement.
Footnotes
1. Dewsnup v. Timm, 502 U.S. 410 (1992)
2. In re Phillips, 224 B.R. 871(Bankr. W.D. Mich. 1998)
Saturday, November 15, 2008
Saturday, November 1, 2008
The Automatic Stay
When a bankruptcy petition is filed in court most collection activities against the debtor must cease. Section 362 of the Bankruptcy Code 11 U.S.C. is known as the “automatic stay.”
The automatic stay applies to:
1) Creditors, who are prevented from going to court or continuing any judicial or administrative proceedings against the debtor to collect a debt. A creditor cannot try to obtain possession or control over any property held by the debtor or to create or enforce a lien against property of the debtor. The automatic stay exists only for claims against the debtor that arose before the debtor filed for bankruptcy.
2) Proceedings in the U.S. Tax Court concerning a tax liability; and
3) Residential Housing. A landlord is preventing from trying to obtain possession of residential rental property during the stay, but not from obtaining commercial property. Foreclosure on a mortgage is normally stayed, except when the action is by the Secretary of Housing and Urban Development to foreclose on a property consisting of five or more units.
The automatic stay does not apply to:
1) Criminal Proceedings, against the debtor;
2) Domestic Support Obligations, such as civil actions concerning the establishment of paternity; the establishment or modification of domestic support obligations; child custody or visitation; the dissolution or marriage; or domestic violence. The division of property in a dissolution of marriage case is stayed and so is the collection of domestic support obligations from property of the debtor, except with respect to withholding of income under a judicial or administrative order or a statute.
The stay does not apply to cases where a state withholds, suspends, or restricts the use of driver's licenses, professional and occupational licenses, and recreational and sporting licenses of individuals owing overdue support or failing, after receiving appropriate notice, to comply with subpoenas or warrants relating to paternity or child support proceedings. Overdue support owed by a parent may still be reported to any consumer reporting agency and a tax refund may still be intercepted. A medical support obligation owed to a state under Title IV of the Social Security Act is not stayed.
Relief from the Stay
The automatic stay will normally continue until the bankruptcy case is closed or dismissed, or when a discharge of debt is granted or denied. However, if the debtor had previously filed a bankruptcy case in the preceding year which was dismissed then the automatic stay will terminate after 30 days. The automatic stay may also be terminated on the motion of a party of interest after notice and a hearing, or when the court grants such relief to avoid irreparable damage to a party of interest.
This article is only an introduction to the automatic stay. A bankruptcy attorney can protect your rights and represent you in adversarial proceedings, such as when a creditor tries to gain relief from the stay.
The automatic stay applies to:
1) Creditors, who are prevented from going to court or continuing any judicial or administrative proceedings against the debtor to collect a debt. A creditor cannot try to obtain possession or control over any property held by the debtor or to create or enforce a lien against property of the debtor. The automatic stay exists only for claims against the debtor that arose before the debtor filed for bankruptcy.
2) Proceedings in the U.S. Tax Court concerning a tax liability; and
3) Residential Housing. A landlord is preventing from trying to obtain possession of residential rental property during the stay, but not from obtaining commercial property. Foreclosure on a mortgage is normally stayed, except when the action is by the Secretary of Housing and Urban Development to foreclose on a property consisting of five or more units.
The automatic stay does not apply to:
1) Criminal Proceedings, against the debtor;
2) Domestic Support Obligations, such as civil actions concerning the establishment of paternity; the establishment or modification of domestic support obligations; child custody or visitation; the dissolution or marriage; or domestic violence. The division of property in a dissolution of marriage case is stayed and so is the collection of domestic support obligations from property of the debtor, except with respect to withholding of income under a judicial or administrative order or a statute.
The stay does not apply to cases where a state withholds, suspends, or restricts the use of driver's licenses, professional and occupational licenses, and recreational and sporting licenses of individuals owing overdue support or failing, after receiving appropriate notice, to comply with subpoenas or warrants relating to paternity or child support proceedings. Overdue support owed by a parent may still be reported to any consumer reporting agency and a tax refund may still be intercepted. A medical support obligation owed to a state under Title IV of the Social Security Act is not stayed.
Relief from the Stay
The automatic stay will normally continue until the bankruptcy case is closed or dismissed, or when a discharge of debt is granted or denied. However, if the debtor had previously filed a bankruptcy case in the preceding year which was dismissed then the automatic stay will terminate after 30 days. The automatic stay may also be terminated on the motion of a party of interest after notice and a hearing, or when the court grants such relief to avoid irreparable damage to a party of interest.
This article is only an introduction to the automatic stay. A bankruptcy attorney can protect your rights and represent you in adversarial proceedings, such as when a creditor tries to gain relief from the stay.
Tuesday, October 14, 2008
Considering Bankruptcy? You're Not Alone.
The decision to file bankruptcy is a hard one to make. You're wondering how it will affect your future finances, but also what the decision will have on your reputation. Perhaps, you are considering the moral and ethical dimensions. If you are a person in recovery then you might be wondering if you will need to one day make amends and repay the debt that is discharged through bankruptcy. If you are in over your head, then bankruptcy might be the best option for bringing balance back to your financial life.
In the United States, over one and a half million families file consumer bankruptcy cases each year. Even large municipal governments, like Orange County California, have filed for bankruptcy.
Bankruptcy is one way to level the playing field between creditors and debtors. When a debtor is behind in payments, the creditor might charge a late fee and increase the interest rate. This can make it even harder for a debtor to catch up. Creditors sometimes are willing to negotiate better terms for a debtor to avoid a complete discharge of the debt through bankruptcy.
While it is possible for a debtor to file bankruptcy on their own ("pro se"), the 2005 Amendments to the Bankruptcy Code created new requirements that must be met. Improper filing may affect your rights. Assistance from a licensed and insured attorney is more important than ever. You can contact me at (323) 822-9422 or by email at link@link-schrader.com
In the United States, over one and a half million families file consumer bankruptcy cases each year. Even large municipal governments, like Orange County California, have filed for bankruptcy.
Bankruptcy is one way to level the playing field between creditors and debtors. When a debtor is behind in payments, the creditor might charge a late fee and increase the interest rate. This can make it even harder for a debtor to catch up. Creditors sometimes are willing to negotiate better terms for a debtor to avoid a complete discharge of the debt through bankruptcy.
While it is possible for a debtor to file bankruptcy on their own ("pro se"), the 2005 Amendments to the Bankruptcy Code created new requirements that must be met. Improper filing may affect your rights. Assistance from a licensed and insured attorney is more important than ever. You can contact me at (323) 822-9422 or by email at link@link-schrader.com
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