A Second Mortgage “Strip” through Chapter 13

“Stripping” off a second mortgage has major immediate and long-term benefits.

 

In a blog post last week we listed 10 ways Chapter 13 helps you keep your home. Here’s the second one of those:

2. Stripping Second or Third Mortgage

Under Chapter 7 you simply have to pay any second (and third) mortgages on your home or lose the home. However, Chapter 13 gives you the possibility of “stripping” that junior mortgage lien off your home’s title. This could potentially save you hundreds of dollars monthly. You could also end up paying just a fraction of the entire balance, or sometimes paying none of it all. That could save you many thousands or even tens of thousands of dollars in the long run.

How do you qualify for this junior mortgage lien “stripping”? The key factor is your home’s value. The second mortgage can be “stripped” from the home’s title if the entire value of the home is fully encumbered by liens legally superior to the second mortgage lien. “Legally superior” liens are those liens ahead of the second mortgage lien on the title.  All of the home’s equity is fully absorbed by liens ahead of it on the title. So the second mortgage debt is declared to be an unsecured debt, and is treated accordingly.

To bring this explanation to life let’s show how this incredible tool works by example.

An Example

Assume that your home is worth $200,000. It lost a lot of value during the “Great Recession” of 2008-2010 and hasn’t gained it back yet. You owe a first mortgage of $210,000 and a second mortgage of $18,000. The second mortgage has monthly payments of $250, with a bit more than 8 years to pay on it. It has a high interest rate of 8%—your credit wasn’t the best when you got this second mortgage loan.

Also assume that you were unemployed for a spell and so fell behind on both mortgages, as well as on other debts. You have a new job but it doesn’t pay as well as the earlier one, so you need help.

You very much want to keep your home. You’ve had it forever and it’s close to your new job. Home and apartment rents are rising in your area. You know that mortgage qualifying standards are tighter now than they were before the Great Recession. So for good reason you’re afraid that it would be a long time before you could buy a home again.

So you need a Chapter 13 “adjustment of debts” to catch up on your home obligations and to deal with your other debts.

“Stripping” Your Second Mortgage

In this scenario you’d be able to “strip” your $18,000 second mortgage off your home’s title through Chapter 13. Your bankruptcy lawyer would file special papers in the bankruptcy court to do so. Those papers would show that the home’s value—$200,000—is less than the amount of the first mortgage—$210,000. So all of the home’s equity is fully absorbed by the lien legally ahead of the second mortgage. As long as the bankruptcy judge accepts this to be true, he or she would declare the second mortgage lien to be “stripped” off your home’s title. Then the debt you owe on the second mortgage—the $18,000—would be treated as an unsecured debt.

The Great Benefits

A number of very good consequences would flow from this.

  • You could immediately stop making the $250 monthly payments. This would make it easier for you to pay the first mortgage’s monthly payments.
  • To the extent you were behind on the second mortgage, you would not need to catch up. This means that during your Chapter 13 case you could concentrate on catching up on your first mortgage. If behind on 6 payments of $250 on your second mortgage, that’s $1,500 you would not have to pay.
  • Your now-unsecured $18,000 second mortgage balance is treated in your Chapter 13 payment plan just like any other unsecured debt. That is, you’d pay it only as much as you could afford to during the 3-to-5-year life of the plan. In most plans there is only a certain amount available to pay all unsecured creditors. So adding the second mortgage balance often doesn’t increase what you pay into your payment plan. It’s not unusual for the second mortgage balance to be paid only a few pennies on the dollar. In fact, sometimes you pay NOTHING on that second mortgage balance (and on your other general unsecured debts).
  • At the end of your successful Chapter 13 case the entire unpaid second mortgage balance is “discharged”—legally written off. Assume for a moment that your payment plan allowed you to pay nothing on this second mortgage balance. Realize that the resulting savings would be substantially more than the $18,000 present balance. That’s because of the substantial amount of otherwise accruing interest that you would also avoid paying. The $18,000 balance at 8% with $250 payments would take a little more than 8 years to pay off, thus including about $6,600 in interest you’d also avoid paying.
  • Lastly, “stripping” the second mortgage off your home’s title would greatly improve your potential equity picture. Instead of owing $228,000 ($210,000 first mortgage + $18,000 on the second mortgage), you’d owe only $210,000. You’d be that much closer to building equity in your home as you paid down the first mortgage and as the home increases in value.

 

Catching up on Your Home Mortgage through Chapter 13

You have much, much more time to catch up on unpaid mortgage payments, as well as any unpaid property taxes.

 

 

Last week we wrote a blog post that listed 10 ways Chapter 13 helps you keep your home. Here’s the first of those ways it can help:

1. Gives You More Time to Catch up on Unpaid Mortgage Payments

Chapter 7 usually gives you a very limited amount of time, usually a year at the most, to catch up on your mortgage loan. In contrast Chapter 13 often gives you years to catch up. This can greatly reduce how much you have to pay each month to eventually get current. The much lower catch-up payments per month can be crucial. That’s especially true if you are many thousands of dollars behind on your mortgage(s). Having so much more time to cure the arrearage often makes the difference between losing your home and keeping it.

We recognize that this explanation might be a little dry. So today let’s see if we can bring it to life and have you can see how this Chapter 13 benefit could really help you.

An Example

Assume that your monthly mortgage payment, including the property tax “escrow” portion, is $1,200. Because of losing your job 2 years ago, you fell behind by 10 payments, or $12,000. You’ve gotten a new job but it does not pay as well as your earlier one. So cash flow is very tight.

You want to keep you home but the mortgage lender has threatened foreclosure for being so far behind. Your bankruptcy lawyer has advised you that if you filed a Chapter 7 “straight bankruptcy” case this lender would likely give you about 12 months to catch up on your missed payments. This means having to pay $1,000 per month on top of your regular $1,200 mortgage payment. Even after legally writing off your debts in a Chapter 7 bankruptcy, you could absolutely not come up with that extra $1,000. So you would not be able to satisfy your mortgage lender and would lose your home.

Chapter 13 Solution

A Chapter 13 “adjustment of debts” would likely solve this dilemma. You’d have as much as 5 years to catch up on the $12,000 back payments. This would bring that impossible extra $1,000 per month down to a much more manageable $200 or so per month.

Why is it that you have that much more time in a Chapter 13 case? It’s because your mortgage lender is stopped from starting or continuing a foreclosure throughout the case’s 3 to 5 year lifetime. A lender can ask the bankruptcy court for an exception to this protection. But if your payment plan is feasible based on the information you present through the help of your lawyer, and if you make the payments required by your plan to catch up on the mortgage, then the court will likely continue the protection of your home.

A Property Tax Twist

Let’s now also assume $200 of that monthly $1,200 payment was for property taxes. So your 10 unpaid payments result in you being $2,000 behind on property taxes.

With most mortgage contracts falling behind on property taxes is a separate breach of the contract. It gives your mortgage lender an independent reason to foreclose (beyond being behind on your mortgage payments).

There’s a sensible reason for that. Eventually the county or other property tax creditor could itself foreclose on your home. The county or property tax creditor is usually legally ahead of your mortgage holder on the home’s title. So at least in theory your mortgage lender could be foreclosed off the property as well. This could leave the lender with absolutely nothing, something it absolutely won’t let happen.

That’s one of the reasons mortgage lenders are so aggressive in insisting that you catch up on the missed mortgage payments—including the property tax portion—so quickly.

Chapter 13 to the Rescue Again

This dilemma is solved by Chapter 13 neatly as well.

When you’re behind on property taxes, the county/property tax creditor is also stopped from foreclosing the home. Your home is protected from that creditor the same as from the mortgage lender. The county/property tax creditor inability to take action against the home protects the mortgage lender as well. Now the mortgage lender no longer needs to be afraid of a foreclosure by the county/property tax creditor. So the lender no longer has this separate justification for its own foreclosure.

Your Chapter 13 payment plan just needs to detail how you are feasibly going to catch up on the property taxes. Of course the plan needs to show that along with how you’re catching up on the mortgage arrearage itself.  And then you need to actually make the payments into that plan to demonstrate that you are actually going to catch up on both sets of arrearages as laid out in your plan.

Back to the Example

So let’s go back to our hypothetical example. You’re behind 10 payments of $200 in property taxes, or $2,000.  You are behind 10 payments of $1,000 in mortgage payments, or $10,000.

Your Chapter 13 plan could state that you would be paying $50 per month towards the $2,000 property tax arrearage. And you would be paying $170 per month towards the $10,000 mortgage arrearage. Let’s assume that you and your lawyer could demonstrate that you can afford to make these payments. If everything else was in order the bankruptcy court would then presumably approve the payment plan.

You’d be well on your way to getting current on your home and saving it permanently from foreclosure.

 

Independence from Debt

This 4th of July make your move towards financial freedom.  Get informed. You’ll feel tons better once you know your options.

 

Is This Your Life Today?

If you’re reading this most likely you’ve got some rather serious financial problems. Most likely your debts are overwhelming you, worrying you all the time.

You’ve probably been trying to improve your situation for a long time, likely for years. It’s really affected your life. It hasn’t helped your personal relationships. The anxiety is impacting your health.  It’s hard to feel good about yourself, to be happy or relaxed.

It’s difficult to take care of your basic daily needs, and of those who depend on you. It’s frustrating to think about the long-term responsibilities that you aren’t getting ahead on, like saving for retirement.

What You Need

Financial peace. Financial freedom.

You’d like to be able to afford what’s important to you. You’d like to not be worrying all the time. You’d like to have reasons to be hopeful; you’d like to have a future worth looking forward to.

Take the First Step

You’ve heard the expression that the first step is always the hardest. There’s something about human nature, especially when we’re feeling down, that makes us assume that resolving a problem will be harder than it actually ends up being. We are often pleasantly surprised that once we take the first step the process is not as hard as we had feared. Then afterwards we wish we would have had the nerve to take that first step much earlier and avoid unnecessary grief in the meantime.

So take that first simple but crucial step: find out your legal options about your debts.

From Fear to Practical Options

You find out your options by seeing a lawyer who focuses on helping people like you solve their consumer and/or business debt problems.

This may be easier than you think because asking for this kind of help is usually free, at least to get started. Most lawyers who help people deal with their debts don’t charge for their initial meeting with you.

At this meeting you will have the opportunity to tell the lawyer about your situation, your concerns, and your goals. The lawyer will usually outline your most likely legal options, along with their major advantages and disadvantages.

But Do You Really Get Something for Nothing at that Initial Consultation?

Most lawyers who help consumers and small businesses with debt problems don’t charge for their initial meeting for various reasons.

And sure, it’s partly a marketing tactic. Lawyers hope that once you take the trouble to meet with them you will like them and will more likely hire them if they decide to retain a lawyer.

There’s also the reality that when you are in financial trouble you likely can’t spare the money on shopping for a lawyer. So fortunately most lawyers don’t charge for that chance for you to check them out and get advice from them.

It’s worth mentioning that most of these lawyers actually do care about you and genuinely want to help you. That’s because who get into the field of helping people deal with their debts they get satisfaction from improving their clients’ lives.

So take advantage of their free offer.

Be Picky and Find a Good Match

Just because you have an initial consultation with a lawyer, you have absolutely no obligation to continue working with that lawyer. You are seeking information and advice, and maybe looking for an attorney to help you. After the initial meeting ask yourself the following questions.

Did the lawyer listen carefully to you to get enough information about you and your finances? Did he or she present your options clearly, and answer your questions about them in an understandable way? Do any of the options presented meet your goals?

Was the lawyer considerate, treating you like a human being? Were your concerns heard and addressed directly? Was the lawyer knowledgeable but not overbearingly so? Were you comfortable with him or her? Did you feel he or she was worthy of your trust? Were you and the lawyer a good fit?

But Won’t Lawyers Always Recommend Filing a Bankruptcy Case?

No. That would be contrary to their ethical and legal obligation to you.

Lawyers are strictly required to represent YOU, not to pressure you into any preconceived direction. They must advise you of your options, and the advantages and disadvantages to you, without any regard for their financial self-interest. They can be sued for malpractice for giving bad advice, or could lose their law license. That applies even to free initial consultation meetings.

Furthermore, a lawyer’s job is to lay out the options so that YOU can make an informed decision. The attorney doesn’t tell you what to do; that’s your choice. Yes, his or her job is to advise you, and usually to make recommendations, strongly or otherwise. But not to make decisions for you or to make you do anything. If the lawyer you meet seems to be putting any uncomfortable pressure on you, find another one who respects your appropriate role as the decision-maker.

Take that First Step

Call to set up a consultation meeting with a lawyer who focuses on debt matters. Meet with him or her. You will almost certainly come away from that initial meeting much, much better informed about your options. You will very likely feel much better about being able to find the freedom from debts that you need.

 

Independence from Debt

This 4th of July make your move towards financial freedom.  Get informed. You’ll feel tons better once you know your options.

 

We take this break from our ongoing series of blog posts on secured debts this 4th of July to talk about freedom from debt. 

Your Life Today

If you’re reading this most likely you’ve got some rather serious financial problems. Most likely your debts are overwhelming you, worrying you all the time.

You’ve probably been trying to improve your situation for a long time, likely for years. It’s really affected your life. It hasn’t helped your personal relationships. The anxiety is impacting your health.  It’s hard to feel good about yourself, to be happy or relaxed.

It’s difficult to take care of your basic daily needs, and of those who depend on you. It’s frustrating to think about the long-term responsibilities that you aren’t getting ahead on, like saving for retirement.

What You Need

Financial peace. Financial freedom.

You’d like to be able to afford what’s important to you. You’d like to not be worrying all the time. You’d like to have reasons to be hopeful; you’d like to have a future worth looking forward to.

Take the First Step

You’ve heard the expression that the first step is always the hardest. There’s something about human nature, especially when we’re feeling down, that makes us assume that resolving a problem will be harder than it actually ends up being. We are often pleasantly surprised that once we take the first step the process is not as hard as we had feared. Then afterwards we wish we would have had the nerve to take that first step much earlier and avoid unnecessary grief in the meantime.

So take that first simple but crucial step: find out your legal options about your debts.

From Fear to Practical Options

You find out your options by seeing a lawyer who focuses on helping people like you solve their consumer and/or business debt problems.

This may be easier than you think because asking for this kind of help is usually free, at least to get started. Most lawyers who help people deal with their debts don’t charge for their initial meeting with you.

At this meeting you will have the opportunity to tell the lawyer about your situation, your concerns, and your goals. The lawyer will usually outline your most likely legal options, along with their major advantages and disadvantages.

But Do You Really Get Something for Nothing at that Initial Consultation?

Most lawyers who help consumers and small businesses with debt problems don’t charge for their initial meeting for various reasons.

And sure, it’s partly a marketing tactic. Lawyers hope that once you take the trouble to meet with them you will like them and will more likely hire them if they decide to retain a lawyer.

There’s also the reality that when you are in financial trouble you likely can’t spare the money on shopping for a lawyer. So fortunately most lawyers don’t charge for that chance for you to check them out and get advice from them.

It’s worth mentioning that most of these lawyers actually do care about you and genuinely want to help you. That’s because who get into the field of helping people deal with their debts they get satisfaction from improving their clients’ lives.

So take advantage of their free offer.

Be Picky and Find a Good Match

Just because you have an initial consultation with a lawyer, you have absolutely no obligation to continue working with that lawyer. You are seeking information and advice, and maybe looking for an attorney to help you. After the initial meeting ask yourself the following questions.

Did the lawyer listen carefully to you to get enough information about you and your finances? Did he or she present your options clearly, and answer your questions about them in an understandable way? Do any of the options presented meet your goals?

Was the lawyer considerate, treating you like a human being? Were your concerns heard and addressed directly? Was the lawyer knowledgeable but not overbearingly so? Were you comfortable with him or her? Did you feel he or she was worthy of your trust? Were you and the lawyer a good fit?

But Won’t Lawyers Always Recommend Filing a Bankruptcy Case?

No. That would be contrary to their ethical and legal obligation to you.

Lawyers are strictly required to represent YOU, not to pressure you into any preconceived direction. They must advise you of your options, and the advantages and disadvantages to you, without any regard for their financial self-interest. They can be sued for malpractice for giving bad advice, or could lose their law license. That applies even to free initial consultation meetings.

Furthermore, a lawyer’s job is to lay out the options so that YOU can make an informed decision. The attorney doesn’t tell you what to do; that’s your choice. Yes, his or her job is to advise you, and usually to make recommendations, strongly or otherwise. But not to make decisions for you or to make you do anything. If the lawyer you meet seems to be putting any uncomfortable pressure on you, find another one who respects your appropriate role as the decision-maker.

Take that First Step

Call to set up a consultation meeting with a lawyer who focuses on debt matters. Meet with him or her. You will almost certainly come away from that initial meeting much, much better informed about your options. You will very likely feel much better about being able to find the freedom from debts that you need.

 

Ten Ways to Keep Your Home through Chapter 13

These 10 tools, especially used in combination, can defeat your mortgage debt and other home-based challenges.

   

A few blog posts ago we said that while Chapter 7 “straight bankruptcy” strengthens your hand with your secured debts, Chapter 13 can be much stronger. One way that Chapter 13 is stronger is in enabling you to keep things you own which have a secured creditor’s lien on them. Indeed, that’s probably the most common reason for filing a Chapter 13 case—to keep your home, vehicle, and/or other possessions at risk of repossession.

Because Chapter 13 can help you in so many ways keep assets with liens on them, we’ll focus today on just one of those assets, your home. Here are 10 ways that this tool helps you stay in your home.

1. More Time to Catch up on Unpaid Mortgage Payments

Chapter 7 usually gives you a very limited amount of time, usually a year at the most, to catch up. Chapter 13 often gives you years, which greatly reduces how much you have to pay each month to eventually get current. If you are many thousands of dollars behind on your mortgage(s) having so much more time to cure the arrearage often makes the difference between losing your home and keeping it.

2. Stripping Second or Third Mortgage

Under Chapter 7 you simply have to pay any second (and third) mortgages on your home or lose the home. Chapter 13 gives you the possibility of “stripping” a second or third mortgage lien off your home title, potentially saving you hundreds of dollars monthly, and thousands or even tens of thousands of dollars in the long run. To do so the home value must be no more than the total of the liens legally superior to, or ahead on the title to, the junior mortgage you want to “strip.” In other words, there can be no home equity being encumbered by the mortgage at issue because that equity is fully absorbed by the other earlier liens. “Stripping” a mortgage can save you many hundreds of dollars every month and many thousands of dollars during the life of your home ownership.

3. Much Greater Flexibility in Selling Home

Chapter 7 gives you at most only about three or four months while your mortgage holder can’t foreclose and your other creditors can’t take action against you or your home. In contrast, under Chapter 13 you could potentially be protected for years. You may need to move and sell your home, but not until you are ready to do so. You may need to wait until a kid finishes high school or you reach an anticipated retirement date. Chapter 13 may allow you to delay selling and curing part of your mortgage arrearage until then, so that you can live in your home in the meantime.

4. Get Current on Past Due Property Taxes

Filing a Chapter 7 case doesn’t protect you from property tax foreclosure—beyond the three, four months that the case lasts. Chapter 13 protects you and your home while you gradually catch up on those taxes, in a court-approved plan that also incorporates your mortgage(s) and all other debts.

5. Protection from Both Previously Recorded and Future Income Tax Liens

Chapter 7 usually does nothing to address tax liens that have already been recorded on the home, or to stop future tax liens on income taxes that you continue to owe after the bankruptcy case is completed. In contrast Chapter 13 provides an efficient and effective procedure for valuing, paying off, and getting the release of tax liens. And the IRS/state cannot record a tax lien on income taxes while the Chapter 13 case is active.

6. The Chapter 13 “Super-Discharge”

You can “discharge” (permanently write off) in a Chapter 13 case obligations arising out of a divorce decree dealing with the division of property and the division of debt (but NOT the provisions about child/spousal support). You cannot discharge these non-support divorce debts under Chapter 7.

So if you owe a significant amount of this kind of debt, and there isn’t already a lien on your home securing it, Chapter 13 could stop a lien from being imposed. The debt would be discharged at the end of your Chapter 13 case as a “general unsecured” debt.

7. Debts Which Cannot Be Discharged Such as Income Taxes & Back Child/Spousal Support

If you owe any of those special debts which cannot be discharged in bankruptcy, as soon as you finish a Chapter 7 case (usually only about three or four months after you start it) the creditors on those debts can start collecting on them from you. Those particular creditors—such as the IRS, the state taxing authority, the state or local support enforcement agencies, and your ex-spouse—often have extraordinary collection powers. They can put a tax lien or support lien on your home, and under some circumstances can even seize and sell your home to pay those liens.

In great contrast, a Chapter 13 case protects you while you pay off those special debts in a payment plan that you propose and is reviewed and approved by the bankruptcy judge assigned to your case. During the 3-to-5-year plan, all of your creditors—including the ones just mentioned above—are prevented from putting liens on your home. By the completion of your Chapter 13 case those special debts are paid in full or paid current, so that they can’t threaten you or your home any more.

8. “Statutory Liens”: Utility, Contractors, Municipal/Local and Other Involuntary Liens

If you had an involuntary liens imposed by law against your home before you file bankruptcy, those liens would very likely survive a Chapter 7 bankruptcy.

These are called “statutory liens” because they are set up through state statutes, or laws. Examples include a utility lien is for an unpaid utility bill, a contractor’s lien (sometimes called a “mechanic’s” or “materialman’s” lien) is for an unpaid, and usually disputed, home remodeling or repair debt, and local government liens for unpaid fees against your property.

These liens against your home generally survive a Chapter 7 case, and so these creditors would be able either to threaten foreclosure of your home to force payment, or at least would force payment whenever you’d sell or refinance your home. Under Chapter 13, in contrast, the protection for your home would generally continue throughout the three-to-five year case, keeping it safe while you satisfy the lien.

9. Judgment Lien “Avoidance”

A judgment lien is one that is placed on your home after someone (usually a creditor) sues you, gets a judgment against you, and records that judgment in the county where your home is located (or uses whatever the appropriate procedure is in your state).

In bankruptcy a judgment lien can be removed from your home under certain circumstances. Although judgment lien avoidances are available under Chapter 7 as well as Chapter 13, it can often be put to better use in Chapter 13 when used in combination with advantages available only under Chapter 13.

10.  Protect Equity in Your Home NOT Covered by the Homestead Exemption

If you have too much equity in your home—value beyond the homestead exemption’s protection—in a Chapter 7 case you run the risk of a Chapter 7 trustee seizing it to sell and pay the unprotected portion of the proceeds to your creditors. Under Chapter 13, in contrast, you can keep and protect the home by paying those creditors gradually over the course of the up-to-five-year Chapter 13 case.

 

Prevent a Creditor with an Unsecured Debt from Turning it into a Secured Debt

Because of Chapter 13’s much more powerful automatic stay, its ability to prevent judgment liens and tax liens is extremely valuable.  

 

Our last blog post described ways that the “automatic stay”—your protection from creditors’ collection actions—is so much more powerful in a Chapter 13 “adjustment of debts” case than in a Chapter 7 “straight bankruptcy.”

One way that this Chapter 13 protection from creditors is better is simply that it lasts much, much longer than under Chapter 7. This benefit is also related to today’s topic, how Chapter 13 can permanently stop unsecured creditors from turning their debts into secured ones. This is an underappreciated advantage of filing a Chapter 13 case.  

Prevent Creditors from Turning Unsecured Debts into Secured Ones

Creditors with secured debts generally have much more leverage than those with unsecured debts. In a Chapter 7 case most unsecured debts get “discharged”—legally written off—without any payment required. In a Chapter 13 case unsecured debts are only paid if and to the extent there is any money left over during the course of the payment plan after paying secured creditors and special “priority” debts (such as unpaid child support and recent income taxes).

Creditors with unsecured debts have a variety of ways of turning those into debts secured against your assets. Two examples are judgment liens and income tax liens, which we’ll discuss more in a moment.

Those liens, as well as other kinds, can turn a debt that can simply be discharged into one that has to be paid in full or in part. Or even if it was a debt that could not have been discharged (such as unpaid child support or recent income taxes), once the creditor has a lien the debt is more dangerous for you, even if you file a bankruptcy afterwards.

Filing bankruptcy—either Chapter 7 or 13—prevents a creditor from converting its unsecured debt into a secured one. The same law—the “automatic stay”—that stops other forms of collection action against you immediately upon the filing of a bankruptcy case, also stops creditors from creating liens against your assets. The U.S. Bankruptcy Code states that filing a bankruptcy “petition… operates as a stay… of–… (5) any act to create… against property of the debtor any lien” that secures a debt existing at the time the petition is filed. (See Section 362(a)(5) of the Bankruptcy Code.)

Preventing Judgment Liens

Any creditor with an unsecured debt you owe can sue you if you do not pay the debt according to its terms. Most of the time such a lawsuit turns into a judgment against you on the debt. State laws determine how the creditor can then collect on the judgment against you. But usually the judgment either automatically becomes a lien against some of your assets or the creditor can take additional steps to create a lien, such as a lien against your home for the amount of the judgment.

As soon as there is a lien, a debt which could otherwise be discharged as an unsecured debt may have to be paid in full or in part in order to get a release of the judgment lien on your real estate or other assets.

Filing either a Chapter 7 or 13 case on a debt that has not yet turned into a judgment will prevent that from happening. Even if a lawsuit has been filed the judgment can be prevented if the bankruptcy is filed quickly enough.

If the debt is the kind that can be discharged in a Chapter 7 case—which includes most unsecured debts—then that will take care of the debt. At the end of the case the debt is discharged and then the creditor has no more debt to sue you for and create a judgment lien on your assets.

But what if the debt is one that is not discharged in the 3 or 4 months that a Chapter 7 case takes to process? If you are accused of having gotten the debt through fraud or misrepresentation there is a good chance the debt would not be discharged in a Chapter 7 case, for example. If the creditor takes appropriate action during the case the debt would not be discharged and the creditor can turn that debt into a judgment and put a lien on your assets.

In a Chapter 13 case you can make arrangements to pay such a fraud/misrepresentation based debt during the course of the 3-to-5-year payment plan. The “automatic stay” prevents the creditor from converting the unsecured debt into a secured one (as long as the creditor does not get extraordinary permission to the contrary from the bankruptcy judge).

Preventing Income Tax Liens

Income tax debts either meet the conditions for being dischargeable in bankruptcy or they don’t meet those conditions. These conditions mostly turn on whether enough time has passed since the tax return at issue was legally due and since the tax return was in fact submitted to the IRS or state tax agency. If the tax meets the conditions for discharge, the tax is simply discharged in a Chapter 7 case, essentially like any other dischargeable debt.

But if the IRS/state records a tax lien before you file a bankruptcy case that turns the unsecured tax into a secured one. Depending on what the tax lien attaches to, you may have to pay the tax in part or in full to get the tax lien released from your assets. So it’s very important to file bankruptcy—either Chapter 7 or 13—before the tax lien is recorded.

But what if the tax is one that does not meet the conditions for discharge? Filing a Chapter 7 case will stop the tax lien for only the 3-4 months that the “automatic stay” is in effect. The IRS/state can record a tax lien on such a tax as soon as your case is closed.

However, if you file a Chapter 13 case instead the IRS/state will be prevented from recording at tax lien throughout the 3-to-5-year period that a case usually lasts. During that period you would pay that tax, on your own schedule and at the same time that you deal with your other important debts. After paying off the tax, without the threat of a recorded tax lien, and completing the case, there would be no more tax debt on which a tax lien could be recorded.

 

Power over Your Secured Debts through Chapter 13

Chapter 7 strengthens your hand with your secured debts. But Chapter 13 can be much stronger.  Starting with a more potent “automatic stay.”

 

The last blog post explained how filing a Chapter 7 “straight bankruptcy” can:

1) temporarily or permanently stop your secured creditors from taking your property in which they have a lien;

2) prevent a creditor with an unsecured debt from turning it into a secured one;

3) help you keep the property which has a creditor’s lien; and

4) if you want, enable you to surrender the collateral to the creditor without owing anything more on the debt thereafter. 

However, another legal option, the Chapter 13 “adjustment of debts,” can often give you a whole lot stronger version of these four benefits than does a Chapter 7 case. You may not always need more help. But in many situations when you do, Chapter 13 can work wonders.

Because there are so many ways that Chapter 13 helps, we’ll cover these four benefits in four blog posts, starting with the first one today.

Benefit # 1: Stopping Secured Creditors from Taking Your Property

In a Chapter 7 case the “automatic stay” stops your secured creditors from taking any action against your property in which they have a lien. This “stay” is imposed immediately as of the moment that your case is filed. This happens just as quickly under Chapter 13. (See Section 362 of the Bankruptcy Code.)

But the “automatic stay” can be tremendously stronger under Chapter 13 for three reasons. It:

1.  lasts much, much longer,

2. can apply also to protect co-signer on consumer debts, and

3. provides a protected environment to allow the other Chapter 13 benefits to work.

Lasts Much, Much Longer

Chapter 7’s “automatic stay” generally lasts only about 3 or 4 months as it protects you and your property from the secured (and other) creditors. Sometimes the period of protection is even shorter. If a secured creditor is aggressive about trying to get back its collateral, that creditor may ask the bankruptcy court for “relief from stay” to start or resume chasing the collateral. Either way, Chapter 7’s “automatic stay” only pauses the action against you and the property.

In contrast, a Chapter 13 case usually lasts 3 to 5 years. The protection of the “automatic stay” over your property can last that entire time.

Just as in Chapter 7, during a Chapter 13 case a creditor can ask for “relief from stay”—permission to pursue your property. But practically speaking, whether or not a creditor asks for “relief from stay” in the first place largely depends on how you and your bankruptcy lawyer treat that creditor in your Chapter 13 payment plan. There are some relatively complicated laws about how secured debts can be treated. You can avoid problems by not giving your secured creditors legal grounds to complain.

Then once the Chapter 13 plan is approved by the court, whether a creditor complains and asks for “relief from stay” after that depends on how well you fulfill the terms of that plan as it affects that creditor.

Even if the plan is reasonable and even if you are making payments on it as approved, the creditor may still ask for “relief from stay” just to force some concessions from you. The creditor may want larger monthly payments to pay off a debt faster, or conditions to induce you to make the payments on time.

This kind of legal maneuvering can complicate the “automatic stay”protection. But it does not change the reality that under Chapter 13 your secured property is usually protected for much longer, giving you a lot more flexibility in how you handle your secured debts.

The “Co-Debtor Stay”

A Chapter 7 case does nothing to stop a creditor from pursuing a co-signer or the co-signer’s collateral. But Chapter 13 does provide this benefit. (See Section 1301.)

There are conditions and limitations to this special “stay.” But from the start the co-debtor stay immediately protects the co-signer and his or her property. That gives you a chance to get your Chapter 13 plan started and see whether and how the creditor responds.

Similar to the usual “automatic stay,” a creditor can ask for “relief from the co-debtor stay” to get court permission to go after the co-signer or his or her collateral. If the creditor does not make this request, your co-signer is protected. Indeed, only if the bankruptcy court says otherwise, your co-signer is protected.

If and when the co-signed creditor makes this request of the court, you may need to pay this creditor more to prevent it from being allowed to go after your co-signer.  Under some circumstances you may be able to pay more to this creditor simply by paying less to your other creditors, while paying no more in total.

Again, it depends on the facts of your case. But the reality is that the “co-debtor stay” gives you the power to protect your co-signers immediately and potentially for the long run, where Chapter 7 would provide no help at all.

Enables the Other Chapter 13 Benefits to Work

Chapter 13 gives you many strong powers for dealing with secured creditors. Many of those only work because of the long and continuous protection provided by the “automatic stay.”

For example, unlike Chapter 7 which provides no legal mechanism for catching up on unpaid mortgage payments, Chapter 13 effectively gives you the entire length of the 3-to-5-year case to catch up. But this only works because throughout this time the mortgage holder is stopped from foreclosing by the ongoing “automatic stay.”

There are many other Chapter 13 benefits that can only be implemented with an ongoing “automatic stay” giving you the necessary protected time.  Just a few examples of these other benefits are:

  • the “stripping” of a second mortgage to stop the monthly payments on that mortgage and reduce the amount of debt against the home
  • “cramdown” of a vehicle loan to reduce payment amounts and the total to be paid
  • catching up on child or spousal support payments while collection efforts are on hold
  • paying off recent unpaid income taxes without the IRS/state being able to pursue you in the meantime
  • catching up on unpaid real property taxes on a home, without your mortgage holder being able to foreclose on that basis in the meantime

 

Chapter 7 Bankruptcy Can . . . Remove a Judgment Lien

Besides legally writing off all or most of your debts, “straight bankruptcy” can often remove judgment liens from the title of your home.

 

Chapter 7 bankruptcy usually has two main goals, and usually accomplishes them. #1: Filing the bankruptcy case immediately stops your creditors from collecting against you and your assets. #2: It legally wipes out forever, or “discharges,” all or most of your debts.

In many Chapter 7 cases those are the benefits it provides. Often those are just the benefits that you need.

But Chapter 7 provides other benefits. Especially if you can’t decide whether or not you should file bankruptcy, these other benefits may help your decision.

“Avoidance” of Judgment Liens on Your Home

The following conditions must be met to remove a judgment lien from your home’s title:

  • The judgment lien must be on your home, your legal “homestead.”
  • You must qualify for and claim a homestead exemption on that home. That usually means that you are living there now, or even if you are not living there at the moment, it is the home you intend to return to.
  • The lien you are trying to remove must be a “judicial lien.” That means a lien that the creditor created through a court judgment. A “judicial lien” is defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
  • The debt that the judgment lien is based on CAN’T be for child or spousal support, or for a mortgage foreclosure.
  • The judgment lien must “impair” the homestead exemption. Essentially that means that to the extent that there is any equity in the home, the judgment lien eats into the equity that is protected by the homestead exemption on the home.

So for example, if:

  • You own a home worth $230,000 with a mortgage of $200,000, and so you have equity of $30,000 in the home.
  • Assume for our example here that the amount of homestead exemption available to you in your state is $35,000.
  • A creditor sues and gets a judgment against you for $20,000, which turns into a judgment lien against your home in that amount.
  • The entire amount of that $20,000 judgment lien eats into the $30,000 home equity that is protected by the homestead exemption. The judgment lien “impairs” the homestead exemption. So the judgment lien would be “avoided,” or released through the power of the Chapter 7 bankruptcy case.

Takes an Extra Procedure

Filing the Chapter 7 bankruptcy and through the 3-4-month process would very likely discharge the debt that caused the judgment and its lien. But getting the release of the judgment lien itself takes an extra step. That extra step—usually a motion filed by your attorney in the bankruptcy court—must be done or else the judgment lien will continue to exist against your home.

This is important because otherwise you could find out that the judgment lien continues to be on your home title months or years later when you’re trying to refinance or sell your home. 

Also, the motion to avoid the judgment lien should be filed while your Chapter 7 case is still open and active, again within about 3-4 months after you file your case. If your Chapter 7 case is completed and closed before you or your attorney files the motion, the procedure to avoid the judgment lien would likely cost you hundreds of dollars more in extra filing fees and attorney fees.

Conclusion

So if you own a home, find out if you have a judgment lien against its title. If you do, talk to a bankruptcy lawyer about whether that lien could be “avoided” in a Chapter 7 bankruptcy case. If so, gaining this very important extra benefit for your home could make filing bankruptcy much more beneficial for you.

 

Power over Your Secured Debts through Chapter 7

Stop secured creditors from taking your property, unsecured debts from turning into secured ones. Keep or surrender collateral as you wish.

 

Our last blog post a couple days was about secured debts. We explained that for a debt to be legally secured against something you own the creditor must go through certain steps to accomplish that, or else it won’t be secured. We showed how you could contractually enter into a secured debt voluntarily. But our blog post also showed that a creditor can turn its unsecured debt into a secured one by suing you or using other means of involuntarily imposing a lien on your possessions and/or real estate.

Today we look at how bankruptcy—specifically Chapter 7—can give you certain powers and advantages over your secured debts.

The Chapter 7 Powers Over Secured Debts

When you file a Chapter 7 “straight bankruptcy” case, doing so:

1) stops your creditor from taking your property which secures a secured debt;

2) prevents a creditor with an unsecured debt from turning it into a secured one;

3) enables you keep property which already secures your debts; and

4 allows you, if you want to give up any property which secures a debt, to give up that property to the creditor without owing anything more on the debt.

–Stop Creditors from Taking Your Property

As of the moment your Chapter 7 case is filed, your secured creditors are immediately stopped from taking possession of whatever you own that secures their debts. This protection comes from the “automatic stay,” the federal law that stops virtually all collection activity by all your creditors again you, your income, and your assets.

The U.S. Bankruptcy Code specifically states in its section on the “automatic stay” that the filing of a bankruptcy petition “operates as a stay, applicable to all entities, of… (3) any act to obtain possession of property … or to exercise control over property…  [and] (5) any act to… enforce against property of the debtor any lien… .” See Section 362(a)(3) and (5) of the Bankruptcy Code. That is, a creditor with a secured debt may not obtain possession or exercise control over your property securing its debt, or enforce its lien on such property, while the “automatic stay” is in effect.

Your vehicle lender can’t repossess your vehicle, or enforce its lien against your vehicle, for example.

This “stay” is in effect either temporarily or permanently. It’s in effect during the time that a Chapter 7 case is active. But normally that’s only a period of about 4 months. You have that amount of time, and sometimes shorter, to make a deal with your secured creditors about either keeping or surrendering property in which they have a lien.

–Prevent Creditors from Turning Unsecured Debts into Secured Ones

The “automatic stay” not only stops secured creditors from enforcing its liens against your property. It also stops creditors with unsecured debts from acquiring new liens against your property. The “automatic stay” prevents unsecured debts from being turned into secured ones.

There are various ways that creditors can do that if you have not filed bankruptcy. Virtually all creditors could sue you, get a judgment against you and a judgment lien against all or much of your property. Or the IRS and state tax agency could get a tax lien against all or most of your property for unpaid taxes. If you get behind on child or spousal support, your ex-spouse or support enforcement agency could impose a support lien against your property. There are many other similar kinds of liens that can be created on your property.

Since creditors with secured debts have much more leverage in bankruptcy than those with unsecured creditors, preventing creditors from acquiring a lien in what you own is an important benefit.

–Enable You to Keep Property Securing a Debt 

If you want to keep your property in which a creditor has a lien, Chapter 7 bankruptcy can help a number of ways:

  • If you are current in your payments on a secured debt and want to keep the collateral, you are virtually always allowed to do so. Your creditor is usually very happy to let you keep making payments to keep the account in good standing. 
  • If you have fallen behind on your payments on a secured debt, you will usually be given a certain amount of time to bring the account current. Catching up on payments—such as on a vehicle loan—should be easier for you to do when you no longer have to pay other creditors after filing a Chapter 7 case.
  • In limited situations the payment terms of the debt may be renegotiated (such as with a home mortgage modification). As a result you may be able to avoid having to catch up on late payments, negotiate a lower interest rate, and perhaps even lower the monthly payment and/or principal balance.
  • Very specific kinds of secured debts, and only under certain circumstances, can be turned into unsecured debts. For example, judgment liens on your home may be “avoided”—taken off your home’s title—and the debt is “discharged” so you pay nothing.

–Allow You to Surrender Property Securing a Debt

If, without filing bankruptcy, you simply surrender collateral to a creditor because you can’t afford the payments, or simply do not need or want the collateral any more, you can end up still owing much of the debt. That’s because after the creditor sells the surrendered collateral for less than the balance, and adds in its repossession and other costs, you could easily end up still owing much of the balance. And the creditor will have the right to sue you for that balance.

In addition, if the creditor were to write off all or part of that remaining balance (through a negotiated settlement, for example), you could be hit with a significant income tax obligation. The amount forgiven may be considered “cancelation of debt income,” which is then treated as income upon which you have to pay income taxes. See the IRS’s “Tax Topic” on “Canceled Debt” and its information specifically on “Home Foreclosure and Debt Cancelation.”

Chapter 7 solves both of these problems. It would almost always “discharge” (permanently write off) any balance owing after the surrender of any collateral. And the “discharge” of debts in bankruptcy is treated as an IRS exclusion of “cancelation of debt income.” So any forgiveness of debt is not considered income and it’s not taxed.

As a result you can freely surrender collateral in a Chapter 7 case if that is what you decide is best for you.

 

Your Secured Debts

Creditors with secured debts often have much more leverage against you than with unsecured debts.

 

The last couple months we have been discussing your bankruptcy options with debts secured by your vehicle, by your home, and by investment or business real estate. You can have debts secured by many other kinds of security—furniture and appliances, other personal property you buy or else had owned beforehand, business equipment and inventory, personal possessions that are subject to an income tax or judgment lien. These are just some of the possibilities. Before we get into these, and how bankruptcy handles them, let’s get a better understanding of secured debts in general.

Secured Debts

It’s quite simple. An unsecured debt is not legally tied to any interest in or right to anything you own. A secured debt IS legally tied to something you own through a lien on it. A lien is defined in the U.S. Bankruptcy Code as a “charge against or interest in [your] property to secure payment of a debt or performance of an obligation.” (Section 101(37).)

For example, vehicle loan is a secured debt. Your creditor has a lien on your vehicle. Your title shows the creditor as the lienholder on the vehicle. That lien is on the title because of what you agreed to in the documents you signed with that creditor. The lien secures your payment of the debt and your performance of other obligations you agreed to in those documents. If you don’t pay the debt your creditor can of course repossess your vehicle. If you don’t pay insurance and it lapses, your creditor can likely “force-place” its own insurance to protect its security interest in the vehicle and make you pay for that insurance.

Voluntarily and Involuntarily Secured Debts

You intentionally give a creditor a lien by entering into a “security agreement”—part of the paperwork you sign when you buy a vehicle, or when you take out a loan and provide collateral in the form or your vehicle or some other collateral you own. (See Section 101(51 of the Bankruptcy Code.)

But there are many kinds of secured debts in which you don’t directly agree to give a lien on your property but it happens by operation of the law. Generally these happen when you don’t pay an unsecured debt and the law provides ways for the creditor to convert that unsecured debt into a secured one.

If you don’t pay almost any unsecured debt or claim against you, the creditor can file a lawsuit against you. If you lose that lawsuit—which you usually do if you owe the debt or the claim is valid—the creditor gets a judgment against you. That judgment can turn into a judgment lien against your home. That judgment lien gives that creditor certain rights against your home, including often the right to foreclose on that lien to force you to pay that judgment.

If you don’t pay income taxes, the IRS or state tax agency can put a tax lien on both your real estate and personal possessions. That tax lien in effect turns those possessions into collateral on the tax you owe.

There are numerous other similar kinds of liens that can be created on your property.

Debts that May or May Not Be Secured

For a creditor to have a lien in your property—whether voluntary or not on your part—the creditor must initially go through the appropriate legal steps create that lien, to turn that debt into a legally secured one.

As a result some debts that you might think are secured debts are not. For example, when you buy some furniture or appliance, whether the debt you owe is secured—whether the creditor could repossess what you bought if you don’t pay—depends on whether it took the legally necessary steps to create a legally enforceable lien. This depend on whether you sign appropriate paperwork that gives the creditor that right in the contract, and then whether the creditor followed any additional required legal steps to create the lien.  

Sometimes a debt is intended to be secured but the creditor does not do what the law requires, and so the debt ends up being completely unsecured. The creditor would not have rights to repossess whatever of yours it could have otherwise. 

 

In our next blog post in a couple days we’ll look at how bankruptcy can give you certain powers and advantages over your secured debts.