Making Sense of Bankruptcy: Qualifying for a Second (or Third) Mortgage “Strip”

You can strip a junior mortgage from the title to your home if the home is not worth enough to have any of its equity covering that mortgage.

 

In our last blog post we explained the huge benefits of the Chapter 13 mortgage strip through the following sentence:

If you qualify for removing (stripping) your second or third mortgage from your home’s title, you would not have to pay that mortgage’s monthly payments, and you’d get much closer to building equity in your home but only at the successful completion of your case.

To get these benefits your home first has to qualify for stripping its mortgage.  Today we explain how you qualify by focusing on the highlighted terms within the following sentence:

To strip a junior mortgage from your home’s title, the value of the home must be less than the combined amount owed on the the senior mortgage(s) plus any other liens that are ahead of that junior mortgage.

Lien Stripping of a “Junior” Mortgage under Chapter 13

By filing a Chapter 13 “adjustment of debts” case, under the right conditions you can not only discharge (legally write off) the entire debt you owe on a second or other junior mortgage but then also wipe the lien that secures that debt off your home’s title. All this, while keeping the home along with its much improved equity position—because you’ll owe that much less on the home than before the lien strip

But to be clear, this mortgage lien stripping applies only to second mortgages, and to third and other mortgages that are lower on the home’s title. You cannot strip the lien of your first mortgage. Indeed you cannot “modify” the terms of your first mortgage at all (except to have more time—up to 5 years–to catch up on any past-due mortgage payments).

The Value of the Home

Mortgage lien stripping has been a much-used tool particularly in the last half-decade or so after the Great Recession lowered the values of so many homeowners’ homes so significantly. The situation was aggravated by the fact during the years before that, home equity second and third mortgages were often handed out under very loose standards, without much equity to cover these junior mortgages from the start. And when the property values sharply declined, that often left no equity at all covering these second and third mortgages. Although property values in some parts of the country have climbed back up significantly, your own home’s value may still allow for a mortgage lien strip.

The value of your home is crucial because under Chapter 13 in particular the law puts a lot of weight on whether the collateral supposedly securing a debt is actually worth enough to be really securing it with value. So the law recognizes when a second or third mortgage has NO EQUITY securing it because that equity is all absorbed by liens that are senior to—come ahead of—that mortgage. Accordingly, Chapter 13 provides a nifty mechanism for establishing that a second or third mortgage which has no equity is actually an unsecured debt—the lien is stripped off the title, making that mortgage legally unsecured, since it had no value securing it.

The Balance Owed on the First Mortgage/Prior Mortgages

In general, you can strip the second mortgage if the balance owed on the first mortgage exceeds the value of the property.

So, for example, if your home is currently worth $200,000, you owe $205,000 on your first mortgage and $25,000 on your second mortgage, you can strip the second mortgage’s lien of your home’s title because all of your home’s equity is absorbed by the first mortgage, leaving no equity for the second mortgage.

But this also works if you have a third mortgage (a second home equity loan, for example). Then you compare the value of your home to the combined balances of the two prior mortgages. If all of the home’s equity is absorbed by the combination of the first and second mortgage balances, you can strip the third mortgage lien.

For example, if you owe $180,000 on your first mortgage on a $200,000 home, and owe $25,000 on a second mortgage and $15,000 on a third mortgage, because the combined balances of the first and second mortgages ($180,000 + $25,000 = $205,000) exceed the $200,000 value of the home, leaving no equity at all for the third mortgage, that third mortgage lien can be stripped off the home’s title.

Account for All Other Liens

Sometimes there are other liens on your home’s title that come ahead of the second (or third) mortgage that you are trying to strip. These prior liens may make stripping the second/third mortgage easier.

The most common prior lien is the one securing your property taxes. If you are behind on your property taxes, that may be a blessing in disguise when it comes to mortgage lien stripping because property tax liens generally come ahead of all other liens, no matter when they arose. Since a property tax lien absorbs some of the home’s equity, that makes more likely that there would be no equity left over for the second or third mortgage and thus able to be stripped.

Similar principles may apply to liens for homeowner association dues or assessments owed, as well as recorded state and federal income tax liens and child/spousal support liens, depending on their timing and your state laws on the ordering of liens. Even utility and municipal liens, construction liens, and other odd kinds of encumbrances on your home’s title can absorb equity ahead of the second or third mortgage you are trying to strip, again making more likely that there would be no equity covering that mortgage.

Conclusion

Stripping a mortgage lien allows you to stop paying that mortgage, and brings a home seriously under water much closer to having equity.  Talk to a competent bankruptcy attorney about whether your second or third mortgage could be stripped from your home’s title to gain these immediate and long-term benefits.

 

Thanksgiving Week: Giving Thanks for Special Home-Saving Tools-Part 2

Save your home by “avoiding” judgment liens and “stripping” your second (or third) mortgage off your title.  

 

Yes, last week was Thanksgiving, but while you’re still finishing up the last of the turkey leftovers here are a couple more things to be thankful for about bankruptcy when it comes to your home. In our last blog, we showed how bankruptcy—Chapter 13 especially—can be tremendously effective with unpaid property taxes and recorded income tax liens. Today we show how, in the right circumstances, to:

  • get rid of judgment liens that are on your home’s title, and
  • save hundreds dollars a month and likely tens of thousands of dollars over time by “stripping” a second or third mortgage from your home.

Before getting into the details, be aware just how extraordinary these two tools are. That’s because they enable you to break one of the main creditor-protection principles in the law–that a secured creditor is entitled to its property rights in the collateral or other security, regardless of the debtor’s ability to “discharge” (legally write off) the debt itself. For example, with a vehicle loan, you can discharge the debt by filing bankruptcy but your lender retains its lien on your vehicle, requiring you to either pay the debt so that you can keep the vehicle or to surrender the vehicle to the lender. We’ll show you how these two tools break creditors’ liens on your home.

“Avoiding” Judgment Liens

The “avoidance” of a judgment lien on your home erases that lien, which a creditor got by suing you on a debt and getting a judgment against you. That judgment is then recorded against the title to your home. That makes the debt thereafter secured by whatever available equity you have in your home. The creditor in effect earned a property right against your home—its potential right to foreclose on your home to make you pay its debt—by taking the legal step it did. But by filing bankruptcy you can, under the right circumstances, erase that judgment lien and the property right that comes with it. That’s a powerful benefit of bankruptcy.

So what are the right circumstances in which a judgment lien can be gotten rid of forever?

  • The judgment lien must have attached to real estate that is your “homestead”—property for which you are entitled to a homestead exemption.
  • That lien must be a “judicial lien,” “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding,” according to the Bankruptcy Code.
  • This lien can’t be for child or spousal support, or for a mortgage foreclosure.
  • The judgment lien at issue must “impair” the homestead exemption. That means in effect that it eats into the equity protected by the applicable homestead exemption.

For example, assume you own a $225,000 home that qualifies as your homestead, you owe $200,000 on your mortgage, and so have equity of $25,000. But a creditor has a judgment against you for $10,000, which is secured by a lien on your home which eats into the equity. But assuming also that you are entitled to a $50,000 homestead exemption, the judgment lien is “impairing” the homestead exemption—the lien is eating into equity that is protected by the homestead exemption. So by filing bankruptcy this judgment lien can be “avoided,” or gotten rid of forever.

Second (or Third) Mortgage “Strip”

If you have a second (or third) mortgage, and your home is worth no more than the balance on your first mortgage, that second (or third) mortgage may be able to be stripped off your home title. This is even more extraordinary than the judgment lien avoidance just discussed above, because here we’re talking about erasing a lien that you intentionally signed on for (and didn’t have forced upon you and your home’s title like a judgment lien). Here’s how mortgage lien stripping works:

  • It can only be done in a Chapter 13 case.
  • You can’t affect the lien on your first mortgage, regardless if your home is worth less than that first mortgage.
  • Lien stripping only works with mortgages or trust deeds or equity lines of credit that you signed onto voluntarily. So it does not apply to many other kinds of liens that could attach to your home—income tax liens, judgment liens, child and spousal support liens, contractors’ liens, utility liens, and homeowner association liens.
  • Your home must be worth no more than the balance on your first mortgage.
  • This lien stripping does not happen automatically in a Chapter 13 case, but is a procedure your attorney has to affirmatively address.
  • You may have to pay a portion of the stripped second mortgage during your three-to-five-year Chapter 13 case. The debt is treated as a “general unsecured” one, and so shares pro rata in whatever funds you are required to pay to your pool of unsecured creditors.
  • Because you do not get a discharge of your debts in a Chapter 13 case until completing it successfully, your lien strip will not work unless you finish your case.

In most situations lien stripping does not increase the amount you need to pay during your Chapter 13 case because the same amount just gets distributed differently among your creditors. Then at the end of your case, you will owe nothing on your stripped mortgage and it will be removed from your title. You pay hundreds of dollars less per month, and tens of thousands less over the life of your second mortgage.

 

Crucial Question: When Should You Consider a Chapter 13 Case Even if Chapter 7 Would Enable You to Save Your Home?

Chapter 13 has so many benefits—some potentially worth lots of money to you—that it’s worth finding out what it can do for you.

 

Why You’d Be Tempted to Not Even Think about Chapter 13

Chapter 7 “straight bankruptcy” usually takes no more than 3 to 4 months from filing to completion. Chapter 13 “adjustment of debts,” in contrast, usually takes 3 to 5 years. And usually costs significantly more.

Why in the world would someone use Chapter 13, especially after determining that they can solve their home mortgage problem with a Chapter 7 case?

10 Good Reasons to Check Out Chapter 13

There are dozens of possible good reasons for filing under Chapter 13, many having nothing to do with your home. But we’ll give you 10 very good reasons that do apply directly to your home—starting with 5 today and then the other 5 in our next blog post in a couple days.

#1: Time to Cure Arrearage:

Under Chapter 7, if you are behind on your mortgage you are at the mercy of your mortgage lender about how much time you will be given to catch up. Ten to twelve months tends to be the norm—although it can be all over the map. You are stuck with whatever your lender demands.

 

In contrast, under Chapter 13 you have up to five years to catch up on any back mortgage payments, with your lender usually not having much say about that as long as you stick to your own payment schedule. Being able to stretch out the catch-up period so much reduces how much you pay each month, making catching up easier and more likely to actually work.

#2: “Strip” Second Mortgage:

Chapter 13—and NOT Chapter 7—may allow you to “strip” your second mortgage off your home’s title, so that you don’t have to pay any or most of it. IF your home is worth no more than the amount you owe on your first mortgage so that you qualify, this mortgage “stripping” could save you hundreds of dollars per month, and tens of thousands (or more) of dollars when you complete the case. Your savings over the life of that second mortgage would be huge—not just all or most of the outstanding principal balance but also all the interest you would have paid (which is often much more than the principal).

#3: Cure Property Taxes While Under Protection:

If you are behind on property taxes, that makes your mortgage lender nervous and angry. That’s because the property tax comes ahead of your mortgage on your home’s title. The lender itself could be foreclosed out—and get nothing—if the property tax lien is foreclosed upon by the county or by whatever governmental entity you owe the property tax to.

Chapter 13 prevents the county/governmental entity from starting a foreclosure, and also provides a good way for you to catch up on the property tax arrearage. That directly helps you, but indirectly helps your lender. At the end of your case you are current on your property taxes, while also being current on your mortgage, making both you and your lender happy.

#4: Pay Off and/or Clear Income Tax Liens at Your Pace:

An income tax lien on your home is handled extremely well under Chapter 13, under all the possible circumstances.

If it is lien on a tax that can be discharged (legally written off)—usually because it is old enough—and there is no equity backing up the lien (because the value of your home is eaten up by your mortgage(s) or other liens ahead of it on the title), you will pay little or nothing on this tax.

If the tax behind the tax lien could be discharged but there IS some equity backing up the lien, then under Chapter 13 you have a good mechanism for minimizing how much you must pay to get the release of that lien. And you also have a good way to pay that amount—through your Chapter 13 plan, all the while being protected from, instead of being at the mercy of, the IRS or state tax agency.

If the tax can’t be discharged—usually because it is not old enough—and there’s no equity backing up the lien, the tax must be paid through your Chapter 13 plan just like any other “priority” debt. So it is paid in full, but usually without interest, and with flexibility in the payment amounts and their timing, based on your budget and your other more pressing obligations.

And if the tax can’t be discharged and there IS equity backing up the lien, the tax is paid in full through your plan, with interest. But again you’ll have flexibility in the amounts and timing of your payments. And you’ll be protected from the IRS/state taking further collection activity against you in the meantime.

In all four of these scenarios, at the end of your case you will owe no income tax and the tax lien will be released.

#5: “Void” Judgment Liens:

A judgment in court against you almost always results in a judgment lien against you in the amount of that judgment—which usually increases over time with interest. The creditor can in many situations then foreclose on that lien to force you to pay it.

You can “void”—get rid of—a judgment lien against your home in bankruptcy. Generally, the equity in the home must just not be any more than the homestead exemption applicable to your home. If your attorney does “void” the judgment lien during your bankruptcy case, that lien will be taken off your title, the debt behind that judgment will likely be discharged, leaving you owing nothing and with a clean title on your home.

Judgment liens can be voided in either Chapter 7 or Chapter 13, but this often works better under Chapter 13 in combination with all of its other home-related benefits.

Conclusion

So, 1) if you are behind on your mortgage payments more than you can catch up quickly, 2) if you have a second (or third) mortgage that can be “stripped,” 3) if you are behind on your property taxes, or 4) if you have a tax lien or 5) a judgment lien, you should look into Chapter 13. That’s true even if Chapter 7 look pretty good at first.  

 

Crucial Question: Can You File a Chapter 7 “Straight Bankruptcy” If You Want to Keep Your Home But Are Behind on Mortgage Payments?

Yes, Chapter 7 may make sense if discharging your other debts will enable you to catch up on your back mortgage payments quickly enough.

 

The Limited Help of Chapter 7

Chapter 7 does not directly help you with your mortgage if you are behind on payments. It protects your home from foreclosure for only a very short time. It may allow you to get rid of a judgment lien, but provides no direct help with income tax liens, back property taxes, child support liens, construction liens, or virtually any other kind of lien on your home.

Chapter 7 helps you deal with these home-related obligations only indirectly, by discharging (legally getting rid of) all or most of your other debts so that you can put all your financial effort into bringing current your mortgage and any other debts with a lien against your house.

If that’s enough help, Chapter 7 may do enough for you.

How to Know Whether This Limited Help is Enough

Commonsensically, you need to know two things:

1) How much time will your mortgage lender give you to catch up on the back payments?

2) How much less will you have to pay to your other creditors once you file a Chapter 7 bankruptcy?

The answer to the first question will tell you how much you would need to pay each month (beyond your regular monthly mortgage payment) to catch up in time on your mortgage. The general tendency in a Chapter 7 case is for mortgage lenders to give you up to about a year to catch up. But your attorney will likely know from past experience with your lender and/or from contacting it how much time it would give you.

The answer to the second question will tell you how much you would be able to pay each month for that catch-up payment, after accounting for your necessary expenses. It will tell you whether you will have enough each month to pay what you need to pay to satisfy the lender within the time you’re given. Your attorney will usually be able to tell you which debts will be discharged (legally written off) and which will not.

A creditor might unexpectedly challenge the discharge of its debt, so there are judgment calls involved in answering this second question. Usually, however, you will be able to predict your post-bankruptcy budget quite well, assuming that your income is consistent and predictable.

So, if you will have enough money available to catch up on your mortgage payments within the timeframe your lender allow, then Chapter 7 will give you the help you need.

Even So, Check Out Chapter 13 Because of Its Advantages

Using the quickest and cheapest option for solving your problem makes sense. So if Chapter 7 gives you the help you need for keeping your home (and that’s also the best way to deal with the rest of your financial picture), use it instead of the much longer and usually more expensive Chapter 13 option.

But Chapter 13 provides so many benefits that Chapter 7 does not—some of which can save some homeowners tens of thousands or even hundreds of thousands of dollars—that you should definitely find out what a Chapter 13 would do for you. You might find out that Chapter 13 is even better for you, even if Chapter 7 might have been adequate.

We will give you a list of the Chapter 13 benefits that can make it worthwhile in our next blog post. So please come back here in a couple days for that.

 

The Nitty-Gritty about Catching Up on Your Mortgage through Chapter 13–Part 2

More answers about how Chapter 13 gives you up to 5 years to catch up on your past-due mortgage.


The last blog, and this one, answer questions about how Chapter 13 gives you time to “cure the arrearage.” Check out the last blog for answers to these questions:

  • Can you give a simple example how this “curing the arrearage” works?
  • If my Chapter 13 plan proposes to catch up my mortgage in 5 years, does my mortgage lender have to go along with this?
  • What if, based on my income, I’m allowed to finish my plan in 3 years instead of 5?

Now on to today’s questions:

How are back property taxes handled?

If you are paying your home’s property taxes as part of your mortgage payment, and you’ve fallen significantly behind on those mortgage payments, the lender may well have paid the current year’s property taxes with its own money. If so, the lender will add the amount it advanced for your taxes into the total amount that you are behind. So through your Chapter 13 plan payments you will simply pay to your lender the amount that it paid for your taxes, as you pay the rest of your back mortgage payments.

If you are paying the property taxes directly (not as part of your regular mortgage payments) and have fallen behind on those taxes, your Chapter 13 plan will include payments to the county or other appropriate taxing authority.

What if the mortgage lender and I don’t agree on the amount of arrearage that’s owed?

Chapter 13 has a relatively efficient mechanism for determining the accurate amount of arrearage. Your creditors, including your mortgage lender, are required to file a document in  bankruptcy court—a “proof of claim”—stating the total amount owned, the amount of arrearage and how it is calculated, as well as the amount of any additional fees. You as the debtor then have the opportunity to object to that proof of claim. The bankruptcy judge is a convenient and experienced decision-maker in these kinds of disputes.

This area has been a controversial one in the past 5-10 years, mostly because lenders have often been inaccurate and unclear in their accounting, and been simply unable to justify the amounts on their proofs of claim. This particularly became a problem when lenders added fees to the balance without telling the homeowners, so that the homeowners would think that they were current only to learn, often after the completion of their Chapter 13 case, that supposedly they were still behind. Bankruptcy Rule 3002.1 was put into place to solve this problem. This rule requires lenders to give timely notice of the amount owed and any changes to the amount, and provides for serious consequences if they fail to follow these rules.

What happens if my circumstances change and I decide not to keep the house after all during my Chapter 13 case?

One of the great features of Chapter 13 is its flexibility. So you CAN change your mind and surrender your house part-way through your case. Or you can sell it.  And at that point you can either stay in the Chapter 13 case or get out of it.

You could stay in it if there were still worthwhile reasons to do so, reasons not related to your house. For example, you could continue the case if you had debts that were best handled in a Chapter 13 case—such as taxes, support obligations, or possibly student loans. Your attorney would work with you to amend your plan to stop payments going to the house and redirect them elsewhere.

But if you filed a Chapter 13 case solely because of your house and now no longer needed or wanted to catch up on the arrearage, your attorney could either “convert” your case into a Chapter 7 one or simply end the Chapter 13 case by “dismissing” it. More likely your case would be converted into a Chapter 7 one to finish taking care of your debts, including possibly debts related to your house.

A big caution comes with all this flexibility. Although it’s good to know when you start your Chapter 13 case that it does not HAVE to be completed as it was originally put together, it seldom makes practical sense to start a case that you don’t intend to finish. You need to have a reasonable chance to complete it. Consider very carefully whether you will be able to make the necessary payments over the whole 3-to-5-year length of your case. If you had trouble making your regular mortgage payment before filing bankruptcy, look at whether Chapter 13, with all of its benefits, will help your cash flow enough so that you will be able to do what the plan requires of you.

The Nitty-Gritty about Catching Up on Your Mortgage through Chapter 13–Part 1

Chapter 13 gives you up to 5 years to catch up on your past-due mortgage. How does this actually work?

 

You get a bunch of tools to help you keep your home when you file a Chapter 13. But the most basic of those tools is this large chunk of time—up to 5 years—to “cure the arrearage.” If you are many thousands of dollars behind on your home mortgage, you need to fully understand how this tool works before investing a lot of time and money doing a Chapter 13 case. This blog, and the next one, should answer your most pressing questions about this.

Can you give a simple example how this works?

Let’s say your monthly mortgage payment is $1,500 and you’ve missed 10 payments, so you are $15,000 behind. If this $15,000 were paid over the full 60 months of a 5-year Chapter 13 plan, that would be $250 each month. ($15,000 divided by 60 = $250.)

If you filed a Chapter 7 case instead, you’d likely be given about 10 months or so to pay that arrearage—amounting to about an extra $1,500 per month. So you’d essentially have to pay double payments, impossible for most people. An extra $250 per month through Chapter 13 may seem hard enough, but this would almost always come with the elimination or significant reduction in what you are paying to other creditors.

(To keep the above calculation simple here, we’ve not included any other fees that could be added to the mortgage arrearage. In most cases the lender would be able to add some late charges, maybe its attorney fees, and perhaps some other costs. And the Chapter 13 trustee would also be entitled to a fee as well.) 

If my Chapter 13 plan proposes to catch up my mortgage in 5 years does my mortgage lender have to go along with this?

Most of the time, yes. Although the lender may be able to attach conditions in its favor.

To use the above example, the lender would almost always have to accept the $250 per month arrangement, and give you an opportunity to make those payments under your Chapter 13 plan. But if the mortgage lender is aggressive, it may be able to impose some conditions, ones that are potentially dangerous for you. For example, the lender could require conditions stating what would happen if you failed to comply precisely with the plan’s payment terms—by not being on time with either the arrearage payment or the regular monthly mortgage payment. If you did not make these payments on time, you could be given a very short last chance to pay them or else the lender would be able to start (or re-start) foreclosure proceedings.

Another way of putting this—Chapter 13 gives you a relatively long time to catch up on your missed mortgage payments, but the system is not particularly patient with you if you are then not able to keep to that payment schedule.

What if, based on my income, I’m allowed to finish my plan in 3 years instead of 5?

You’re certainly not required to use the full 5 years, if you can pay off the arrearage and the rest of your Chapter 13 obligations (such as any taxes or back support) faster. Using the above example, $15,000 in missed mortgage payments spread over 36 months would require about $417 per month (again, excluding some likely extra fees), instead of $250. Generally, you would want to finish your Chapter 13 case faster if possible, but should keep your monthly payment low enough to make more likely that you will be able to complete it successfully. If your income qualifies you for a 3 year plan, you are generally allowed to have in a plan that lasts anywhere between 36 and 60 months, depending on what your budget allows.

 

The next blog will cover these remaining questions:

How are back property taxes handled?

What if the mortgage lender and I don’t agree on the amount of arrearage that’s owed?

What happens if my circumstances change and I decide not to keep the house after all during my Chapter 13 case?

What if Protecting Your Home Is Your Highest Priority?

You may have serious financial problems but have still managed to keep current on your mortgage.  How does bankruptcy NOT hurt your home but instead protects it?

 

If you are current on your mortgage (or mortgages) in spite of being behind on other debts, it’s likely because your home is very important to you. If you intend to keep your home, you’ll be happy to hear that the bankruptcy system supports that decision in many ways.  

Bankruptcy helps you keep your home in three broad ways:

1. By protecting your home equity and ownership.

2. By preserving your relationship with your mortgage holder.

3. By enabling you to concentrate on paying for your home-related obligations by writing off or managing your other debts.

Protect Your Present and Future Home Equity and Ownership

With the devaluation of homes throughout the country during the last 4, 5 years, many homeowners have no equity or have much less than they used to. If you do have some equity, it’s highly likely that it is protected by the homestead exemption. That’s the first thing that I would determine with you if you came to see me for a consultation.

When deciding whether to keep your home, understandably you think about whether it’s a smart move for the present, but it’s wise also to look towards the future. Just as the decision to keep a house is both a financial and personal one, consider the future aspects of that decision both financially and personally.

On the financial side, no one knows what the housing market will do in any particular region or neighborhood in the near term, much less the long term. For many reasons, residential rental costs are rising rapidly in many areas of the country, and home values are expected to follow eventually. Assuming that your home will increase in equity at some point, filing bankruptcy now will protect that equity from your present creditors forever.

Beyond the strictly financial issues, you undoubtedly have deeply personal ones that legitimately affect your decision.  You have the right to use the legal system in a fair way to serve your personal values. It is understandable that your home is important to you because you have children in the local school district, because your neighborhood is the core of your social community, because you want your adult children and grandchildren to have a comfortable place to come visit you, because keeping your home will help hold together your marriage and your family, and even because you know that holding onto that critical piece of stability is important for your self-esteem and mental health. Bankruptcy is often an appropriate and effective way to preserve these values in your life.

Keep Your Mortgage Holder Happy

Some homeowners who have moved mountains to keep current on their mortgage and to preserve their mortgage credit history are concerned whether bankruptcy will hurt that important relationship. Simply said, if you are current on your mortgage and intend to continue being, for all practical purposes filing bankruptcy will have no effect on that relationship.

If you file a Chapter 7 “straight bankruptcy,” you will continue making mortgage payments as normal. Your mortgage holder will get a standard notice about your case, but at about the same time will receive a formal notice that you intend to continue making the payments. We will discuss with you whether you should go through the formality of “reaffirming” the mortgage debt, but that is personal conversation beyond the scope of this blog.

If you file a Chapter 13 “payment plan,” you will very likely continue making the mortgage payments directly to your mortgage holder, instead of through the Chapter 13 trustee, to whom you pay your monthly “plan” payment for other creditors. (That may be done different in some jurisdictions, but in any event you will be making your full mortgage payment.) Your mortgage holder will receive a standard notice about your Chapter 13 case, but at about the same time will receive a copy of your “plan” showing that it will continue being paid directly. As long as you pay your mortgage on time, and fulfill any other contractual obligations to the mortgage holder, such as keeping current on your property taxes and insurance, your relationship with the mortgage holder will continue as normal.

Concentrate on Paying for Your Home

Bankruptcy will take away other financial pressures so that you can focus your financial and emotional energies on what is most important to you—your mortgage and other home-related obligations. You will be relieved of these other financial pressures potentially in two ways: by the write-off (discharge) of debts, and/or by the restructuring of other debts. The details depend on the nature of your debts, the other specific facts of your case, and the choices we will help you will make. But the key point is that you will much more easily make your mortgage payments, and so keeping your home will become much more realistic.

AARP Report Says More Older Americans Now Still Have Morgage Debt, Larger Mortgages, and So–Surprise–More Foreclosures

Not only is the foreclosure rate climbing for older mortgage holders, it is climbing faster than it is for younger ones.

 

The last blog described two very significant changes in home mortgages among older Americans in the period from 1989 to 2010: a much larger percentage of them have mortgages on their homes, and these mortgages are much larger. Now almost twice as many 65 to 74 year olds continue to have a mortgage to pay, and nearly three times as many 75+ year olds do so. And the median amount of mortgage debt has nearly tripled in this time period for 55 to 64 year olds, while the amount has increased about four and a half times for 65+ year olds. These are the results of a report released earlier this month from the AARP Public Policy Institute.

This report also showed that, although the foreclosure rate for older American mortgage holders is consistently less than for younger ones, the older mortgage holders’ foreclosure rate is climbing faster. Take a look at this data tabulated in the report:

Foreclosure Rates by Age

2007

2008

2009

2010

2011

% Change 2007–2011

<50

0.42%

0.97%

1.84%

2.83%

3.48%

729%

50+

0.30%

0.66%

1.32%

2.27%

2.92%

873%

Notice that in every single year, the foreclosure rate was lower for those 50 years old or older than for those under 50. But also notice that the increase in the foreclosure rate was greater for the older Americans.

It makes sense that older homeowners would have a fewer foreclosures as a group. On average they’ve presumably owed their homes longer, bought them when prices were lower, and have had more time to pay down or pay off their mortgages. They would tend to have more income stability, and have had more time to accumulate savings and other resources with which to make mortgage payments if their income was reduced. And more of them would have sold their homes before the bubble burst when they cashed in their home equity for more modest homes.

As for why the foreclosure rate has increased more for older Americans, this flows directly from the two main conclusions of the last blog: because they are much more likely now to be carrying a mortgage at all, and because those mortgages are larger. Instead of no longer having a mortgage from having paid it off, or instead of owing a small balance in the final years of a mortgage with a modest payment, more are stuck with a sizeable obligation into the future.

So, older Americans are vulnerable month-to-month because of higher monthly mortgage obligations. And they are vulnerable long-term because they have less equity in their homes or none at all.  They are in the period of their lives when it’s more difficult to get hired or re-trained, when they are more likely to have health issues, and when they are on fixed incomes while expenses continue to rise. So it’s not surprising that more of the current AARP generation is ending up in foreclosure.

 

“Nightmare on Main Street,” the AARP’s Report on Older Americans Coping with the Continuing Foreclosure Crisis

This new AARP study reveals shifts in mortgage patterns with huge immediate and near-future consequences.

 

You’d think that older Americans as a group would be more secure in their homes than younger Americans.

Common sense says that a larger percentage of older Americans would have no mortgage debt at all, having had more time to pay off their mortgages.

And those who had mortgages would owe less on them, because they bought their homes when they were less expensive, and have had more time to pay them down.

Some of this is accurate, as revealed by the AARP study released last week.

Families Carrying Mortgage Debt

The percentage of families who owe any mortgage debt is indeed lower for older Americans. Specifically, families in which the head of the household is 55 or older are less likely to have mortgage debt than families in which the head of the household is 35 to 54 years old. About 60% of the younger families are carrying mortgage debt while 56.6% of families headed by 55 to 64 year olds are doing so, 40.5% of families headed by 65 to 74 year olds, and 24.2% of families headed by 75 year olds or older. The older the age category, the less had mortgage debt. As expected.

But, hidden behind this expected result is an extremely problematic development. From 1989 until 2010, the percentage of families which carry mortgage debt hardly changed at all for the age categories 54 and younger. In contrast, for older Americans this percentage has skyrocketed.

For 55 to 64 year olds, the percentage paying mortgage debt has gone up from 37.0% in 1989 to 53.6% in 2010, a 45% increase, for 65 to 74 year olds from 21.7% to 40.5%, an 87% increase, and for those 75 years or older, from 6.3% to 24.2%, a 284% increase.

Thinks about it: instead of being secure in their homes, almost twice as many 65 to 74 year olds continue to be burdened by having to pay a mortgage, and as are nearly three times as many 75 year olds and older.

Amount of Mortgage Debt

A similar change is happening with the amount of mortgage debt owed by each of these age groups. Although younger families owe more mortgage debt, older Americans’ mortgage debt has increased much more.

For 55 to 64 year olds, the median mortgage debt amount has nearly tripled, from $33,800 in 1989 to $97,000 in 2010.  While for 65 to 74 year olds and also 75 year olds and older, that amount has increased about four and a half times, from $15,400 in 1989 to $70,000 in 2010, and from $11,800 in 1989 to $52,000 in 2010, respectively. These increases make the homes of older Americans much more vulnerable.

Conclusion

Older Americans are facing a

difficult struggle: falling average incomes coupled with rising mortgage payments and property taxes; increasing medical expenses; more debt; and increased longevity. The increases in mortgage borrowing and foreclosures indicate that many older homeowners have been relying on their home equity to finance their needs in retirement and may be running out of options.

A Combination of Chapter 13 Tools for Saving Your Home, Illustrated

It’s often the combination of tools that come with Chapter 13 that allows you to keep your home. Because Chapter 7 has only some of these tools, sometimes it can’t do nearly as much for your home as Chapter 13 can.

 

Please read my last blog. There I laid out an example to illustrate how much a Chapter 13 case can do—on multiple fronts—to enable you to keep your home. That example also shows why sometimes Chapter 7 is not effective for that purpose. Today I explain how Chapter 13 can pull it off.

To summarize, here is a list of this hypothetical person’s debts:

  • first mortgage arrears: $5,000
  • first mortgage balance: $230,000
  • second mortgage arrears: $3,000
  • second mortgage balance: $50,000
  • past-due real estate taxes: $2,000
  • judgment lien from unpaid medical debt: $8,000
  • 2009 income tax with tax lien recorded against the home: $3,000
  • 2010 and 2011 income tax: $5,000 (no tax lien, yet)
  • credit cards: $18,000

A Chapter 7 “straight bankruptcy” would discharge (write-off) all or most of the credit card balances, as well as the medical bill that turned into the judgment, and likely even get rid of that judgment’s lien on your home title. That would save you about $26,000, and take away the threat to your home from the judgment lien.

But that still leaves both mortgage arrears, the past due real estate taxes, and many thousands of dollars of income tax debts, one holding a tax lien on the home. This debtor can afford to pay a total of $1,500 per month to all creditors, but with a $1,000 first mortgage and $300 second mortgage regular payment, that leaves only a measly $200 per month for the mortgage arrearages and all the taxes. Looks quite hopeless.

And yet, here is how Chapter 13 could be the solution:

1. Stripping second mortgage: In this example the home is now worth $225,000, less than the $230,000 balance on the first mortgage. So there is no equity in the home securing that second mortgage. Under these conditions, Chapter 13 can legally turn that second mortgage balance into an unsecured debt. (This cannot be done under Chapter 7). As a result, the debtor no longer pays the $300 monthly mortgage payment, freeing up that amount to pay other more important creditors. So instead of $200, there’s now $500 per month available to pay the remaining creditors.

2. Plan payment of $500 per month: Paying this $500 per month into a 36-month Chapter 13 payment plan results in a total of $18,000 paid ($500 X 36 = $18,000), or a total of $30,000 in a 60-month plan ($500 X 60 = $30,000). The length of a plan depends on a number of factors. But in this case let’s assume that the plan will run only as long as it takes to pay all secured and priority creditors—here, the first mortgage arrears and all the property and income taxes. That’s $5,000 of arrears, $2,000 of property tax, $8,000 for all the income taxes, or a total of $15,000. Interest needs to be paid on the property tax and on the portion of the income taxes with the tax lien, but Chapter 13 often allows those debts to be paid faster to lessen the amount of interest. The plan payments also need to pay the Chapter 13 trustee– usually a percentage of the amount flowing through the plan–plus whatever portion of the debtor’s own attorney’s fees not paid before the filing of the case. To simplify the calculations, let’s estimate that the total amount that the debtor would need to pay into the plan would be $20,000. At $500 per month, that would amount to 40 months of payments. (In some situations, the unsecured creditors would also need to be paid a certain amount of money or a certain percentage of their debt. In that situation, the $500 payments would need to be paid into the plan that much longer.)

3. Continuous protection from the creditors by the “automatic stay’: During the entire length of the Chapter 13 case—this estimated 40 months–the “automatic stay” would be in effect, preventing any of the creditors—the mortgage lenders, the property tax creditor, or the IRS—from taking any action against the debtor or the debtor’s home. So the first mortgage lender would not be able to start or continue a foreclosure because the monthly payments or the property taxes weren’t current. The property tax creditor itself could not conduct a tax foreclosure. And the IRS could not enforce its tax lien nor could it record a new one for the more recent tax debts.

4. Debt-free: At the end of the 40 months or so, the first mortgage and property taxes would be paid current, all of the income taxes would be paid in full, the tax lien would be released, and all the (remaining) unsecured debts would be discharged, leaving the debtor debt-free.