Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Your Right To Credit Reporting After Bankruptcy

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credit report after bankruptcy

You’ve finished your Chapter 13 and emerged from bankruptcy with your home loan current.

But your credit report is a blank page as to your mortgage.

The mortgage servicer isn’t reporting your payments to the credit reporting agencies.  

Nothing. Nada.  Crickets.

So, even though you’re making regular payments, you’re not visibly rebuilding your credit.

Ask the servicer and they’ll tell you that they can’t report your payments “because of your bankruptcy discharge“.

But they are wrong:  a little-discussed provision of Chapter 13 says that long-term mortgage debt is not discharged in 13.

Yup.  The mortgage loan is not discharged as a personal obligation.

And therefore, there is no bar to the servicer reporting your payments, and every danger should they not report.

Servicer’s obligation to report

Put simply, if a creditor reported to credit reporting agencies before the bankruptcy was filed, then there is an obligation to report after the bankruptcy.  The “furnisher”, the creditor who supplies information to the credit reporting agency, has an obligation to make the information on file fully accurate.

In contrast to an unsecured debt like a credit card, which should be reported as having a zero balance after the discharge, the mortgage loan after Chapter 13 has a balance.

Presumably, it is also current.  Both facts which should appear on your credit report.

Mortgages excluded from Chapter 13 discharge

I’m certain you will have to cite to bankruptcy law when you challenge the improper reporting on a mortgage loan after Chapter 13.

Here’s the part of the Bankruptcy Code that excludes long term debt like your mortgage.

Section 1328 says,

(a)… the court shall grant the debtor a discharge of all debts provided for by the plan …, except any debt—

(1)provided for under section 1322(b)(5); 

The section that 1328 incorporates, Section 1322(b), says

(b)Subject to subsections (a) and (c) of this section, the plan may—

(5) … provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due;

Get mortgage payments reported

If you find that your post discharge payments on your home loan aren’t being reported, challenge the accuracy of what is on your report about that loan with the credit reporting agency.

It is the CRA’s responsibility to see that information in your credit file is accurate.  The CRA is supposed to ask the furnisher to reinvestigate the challenged tradeline.

The Consumer Financial Protection Bureau has a how-to, with a template letter, on how to dispute inaccurate information on your credit report.

Get the good information reported.

More

How to find and fix credit reporting errors

Your post bankruptcy to-do list

Home Remedies For Foreclosure Breed Bankruptcy Tragedies

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Warning: virulent outbreak of do-it-yourself bankruptcies all around.

Symptoms:  panic over prospect of foreclosure

Supposed remedy:  file your own skeleton Chapter 13 bankruptcy

Prognosis: enjoy the stay for about 2 weeks, followed by foreclosure relapse

Homeowners facing foreclosure

Three different would-be clients called in a 10 day period this month, facing foreclosure.  And all three had the same tragic, but avoidable story.

I was on the trail of an epidemic.

Each had filed an emergency bankruptcy petition to address a looming foreclosure.  They then did nothing to file the balance of the schedules necessary in their cases.

How dismissal differs from discharge

Without schedules,  the case was dismissed, automatically. No court hearing, just tossed out for failure to follow the order that says “you’ve got two weeks to file the rest of the papers”.

And they did the same thing all over again a little bit later, again filing only the bare minimum of paperwork, before the second case is dismissed.

With two cases dismissed in the past 12 months, there will be no automatic stay in a third case.  The  bankruptcy won’t prevent the lender from foreclosing.

As a bankruptcy attorney, my bag of remedies was essentially empty.

Why homeowners sucked in

I understand the appeal of the automatic stay: it’s a lynch-pin of bankruptcy relief.

The automatic stay is powerful:  it applies to all creditors, it makes actions in violation of the stay void, and it becomes effective instantly upon filing bankruptcy.

The necessary paperwork to initiate a case is minimal, and the filing fee is just over $300.

Pretty seductive if you are panicked about losing your home.

Multiple filings labeled abuse

The pattern of debtors filing, getting dismissed, and filing again irked lawmakers back when the last round of bankruptcy amendments passed Congress in 2005.

After “reform”, every debtor gets a stay in their case.

File a second case within 12 months after the first was dismissed, and the stay lasts only 30 days.  The court will consider extending the stay if the debtor applies and gets an order within that 30 days.

File a third case, after two dismissals within 12 months, and there simply is no stay.

Chapter 13 can save your home

The tragedy in all of this is that Chapter 13 works, if you want more than just a two week stay.  Few problems that threaten foreclosure can be solved in two weeks.

How 13 can save your home

Understand that letting your case be dismissed cripples your  ability  to use bankruptcy in another case.

More

What should bankruptcy cost

How to interview a bankruptcy lawyer

Don’t wait til the day before foreclosure

Image courtesy of torange.biz.

Getting Rid Of Junior Home Liens In Bankruptcy

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One of Chapter 13’s superpowers is its ability to strip off otherwise valid, voluntary liens on a home.

Ordinarily, liens survive a bankruptcy discharge as a charge on the collateral;  it’s the borrower’s personal liability that is wiped out.

But Chapter 13 allows the elimination of liens when the lien isn’t really secured by any value in the collateral.

Rules of lien stripping

This is law, so you knew there’d be rules:

  1. A voluntary lien, like a deed of trust securing a second loan, line of credit, or HELOC, can be voided only in Chapter 13 or Chapter 11.
  2. It can be stripped only if there is no equity in the property after deducting the payoff balances of the liens senior to the lien from the fair market value of the property.
  3. The lien is permanently voided only upon the successful completion of the reorganization plan.

Thanks to lobbying by the mortgage lenders more than twenty years ago, bankruptcy courts are prohibited from compelling any changes to mortgages liens secured only by the debtor’s home.

So, the work-around, if you like, is a finding by the bankruptcy court that the junior lien isn’t really “secured” by any value in the home.  If it’s not secured, the prohibitions don’t apply.

If there is a dollar’s worth of equity in the property, the lien must remain. A dollar out of the money, and the whole lien is gone.

Limits on bankruptcy relief

As a result of the limitations imposed by Congress, the help for homeowners that bankruptcy reorganization provides is limited to voiding totally unsecured liens and to eliminating other debts of the homeowners.

Limitations don’t apply to real property not acquired to be the borrower’s principal residence

Neither can the bankruptcy court  require the senior lender to modify a mortgage or to defend its decision to reject a modification.

Legislation passed by the House of Representatives in 2009 would have overturned the prohibition on modifying home loans and allowed judges to reduce mortgage balances to the present value of the home and alter other terms of the loan if the borrower was willing to file bankruptcy and successfully made the plan payments. The Senate defeated the bill, so bankruptcy judges remain powerless to weigh in on the tug of war between the mortgage bankers and the homeowners.

As always, you need to determine whether you should keep the house. and what the viability of a modified mortgage is.

You’ve got choices for a house even after you file bankruptcy.

Stripping off judgment liens

Eliminating tax liens

Cancel by Nick Youngson CC BY-SA 3.0 Alpha Stock Images

 

No Foreclosure If Loan Modification In Process

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foreclosure roofline 650 taberandrew

The cruelest trick played on homeowners trying to modify their mortgage was dual tracking.

One side of the bank assured the borrower that their loan modification application was being considered and they didn’t need to worry.

All the while, the other side of the bank was conducting a foreclosure sale.

The borrower wakes up to find that they are no longer homeowners.

No more.

New federal rules prohibit dual tracking

Mortgage lenders are now prohibited by federal law from conducting a foreclosure while a mortgage modification application is under consideration.

Regulation X – Real Estate Settlement Procedures Act

Before a foreclosure is begun, the lender or their servicer must take steps to let the borrower know what options exist to keep the house.  The mandated timeline creates a four month interval between delinquency and starting the foreclosure in which alternatives can be explored.

Live contact with borrower

Mortgage servicers must attempt to make live contact with borrowers who become delinquent within 36 days of the delinquency.  A voicemail message doesn’t cut it.  Reg. X §1024.39

The servicer must describe the kinds of loss mitigation options that are available and they must establish a single point of contact for the borrower with the servicer.  Reg. X § 1024.40

No foreclosure can be instituted until 120 days have passed from the first delinquency.  More importantly, if a complete loan modification application has been submitted to the the servicer by the 120 day point, no foreclosure can be begun.  Reg. X §1024.41

Last minute help

If the borrower misses the 120 day deadline for submitting a loan modification application, there’s still protection in the new rules.

If a loan mod application is made more than 37 days before the foreclosure sale, the servicer cannot conduct a foreclosure sale until it issues a decision on the application.

The new rules deal with a myriad of variations on these timelines.  The theme in the rules is consistent:  federal law requires a decision on a loan modification application before the foreclosure train chugs down that track.

If the servicer breaks the rules

The new rules have teeth.

Borrowers who believe their servicer has failed to follow the rules can sue the servicer.  If you can prove your case, you can collect your actual damages as a result of the violation; your costs of suit; and your attorneys’ fees.

These regulations implement provisions of the Dodd Frank legislation; they became effective January 10, 2014.

Another arrow in homeowner’s quiver

These rules do not preempt other rights that homeowner’s have in this arena that give them greater rights.

Like any new law, we will have to see how they work over time.

While the rules don’t require servicers to modify loans, they do require servicers to refrain from foreclosing while a loan modification application is pending.

Image courtesy flickr and taberandrew.

The Worrisome Truth About Silent Second Mortgages

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silent mortgagesLike a sleeping bear, long-silent second mortgages hibernate in people’s houses these days.  They are quiet, a snoozing predator, just waiting for spring.

And it can be bloody when those sleeping mortgages awaken hungry and look around for something to fill its pocket.

Here in California the coming slaughter is particularly noticeable because the value of real estate has rebounded to 2006 levels and beyond in many areas of the state.

Waves of foreclosures have now started lapping on the financial beach just as the federal government declares that everything is coming up roses for the economy.

These foreclosures are kin to the FIRST WAVE that devastated the nation. Both were triggered the largest financial fraud in US history. (A massive systemic fraud the US taxpayer was obliged to finance while being victimized.)

The current wave of foreclosures involves the “Sleeping Giant Second Mortgages” on millions of homes across the country.

“I Thought It Went Away”

For more than half a decade, the gigantic financial fraud carried out by Wall Street and the lending industry jack-hammered real estate prices to such low levels that second mortgages had no chance of receiving a penny if they foreclosed.

Worse still, if they foreclosed, they would be saddled with paying a first mortgage that was no longer fully secured by the value of the real estate. In the icy financial winter that followed, many second mortgages holders took the “long nap”.

Second lenders stopped calling the homeowner. They stopped sending the homeowner ANY notices relative to their second mortgage(s). They hibernated.

Here in California many second mortgage holders went even further.

They told homeowners typically over the phone that the lender had “charged the loan off their books”. Then the lenders coupled this a form 1099-C. (Sometimes a 1099-A, or my personal favorite, the form 1099-MISC which is an absolute outrage. We’ll talk about form 1099(s) issues by the lending industry in another article soon.)

What was a homeowner to think? “They didn’t call”…”They didn’t write”…”They charged it off”…”They sent out a form 1099 for debt cancellation.”

Homeowners by the millions concluded “It went away.” But it didn’t.

A Second Mortgage isn’t a Puppy that Follows You Home

You aren’t getting a “free” loan that you don’t have to repay because the lender needs to show you the note or because MERS is illegal.

Don’t waste your time on this nonsense.

In California the horrible truth is that EVEN the issuance of a form 1099 for debt relief in the situation described above, DOES NOT, in and of itself, mean the debt has been cancelled within the meaning of Section 108 of the Internal Revenue Code.

It can simply mean a particular lender has written the debt of their books. In all probability it means the debt was sold to someone else to collect. (They virtually always end up in the hands of another creditor.)

If there is a recorded deed of trust or mortgage instrument, and there virtually always is, the loan is a secured loan.

A loan secured by real estate is just about the best form of long term debt anyone can hold DEPENDING ON THE VALUE OF THE REAL ESTATE.

So when the value of real estate began to go up decisively, these secured second mortgages begin to “bloom” like California Poppies in spring.

When the Second Mortgage Wakes Up, You Need To

mortgage lender awakenedWhen a second mortgage holder comes out of hibernation, they are typically ravenous.

Like a grizzly bear with an empty stomach, they will initiate foreclosure and eat your home with little ado. It is a very good bet the lender is well versed as to the current value of the real estate and will feel quite confident that they can obtain the yield necessary to make the process worth their while.

Actually it’s much better if you “wake up” before the second mortgage holder does.  You almost always have better options if you face this problem as early as you can.

There are still rare cases in which the value of the property currently is less than the first mortgage.  If so, a Chapter 13 bankruptcy can be used to strip off the second and discharge it for virtually pennies-on-the-dollar while the homeowner retains the house.

If the house still has a very depressed value the homeowners may be able to  negotiate a reduced settlement figure and permanently cancel the debt. (In which case a form 1099 should be expected for the tax year in which the note is cancelled in exchange for the reduced payoff.)

There may be other moves a homeowner can make, like using a bankruptcy to catch up all the missed payments on a sleeping second. I hate this one but in the case of folks who can afford the payments, and who want to keep the home, this may be viable.

Sometimes it’s time to sell the house. I like my homeowners to sell their homes at premium prices long before some “snarling second” files a Notice of Default (N.O.D.) artificially depressing the value of the real estate.

Avoid a Notice of Default if You Can

If at all possible, don’t let a second mortgage holder get to the point where they have filed a Notice of Default before you take action.

You are then on the defensive and your options dwindle with each passing day. Worse yet, lenders will deliberately engage you in fruitless dialogue to try to draw out the time until they can sell your property.

I’ve seen this type of violation of the duty of good faith and fair dealing by lenders over and over again. Almost none of the dialogue will be in writing and it’s hard to prove in court.

Especially don’t wait until a date has been set to sell your property.

In California the non-judicial foreclosure train has left the station once an N.O.D has been filed. There are only three general methods to “stop or slow” this train.

Each method has its benefits and burdens. Often one or more of the methods are practically impossible for the homeowner to utilize.

You need to start early. There are no EASY ANSWERS.

But there are more options and better answers the sooner you shake off your winter slumber and sneak up on the sleeping giant in its lair.

Guest author Bill Purdy is a tax and real estate lawyer with Simmons and Purdy in Soquel, California.  He and his partner Pam Simmons are my go-to resource for all matters of tax and mortgage law.  I’m tickled to share Bill’s pointed perspective on California mortgage law.

Know What You Really Owe: Your Mortgage Loan Rights

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house check stockmonkeys dot com_optYou’ve got a lot to keep an eye on.

You probably regularly check

Your blood pressure.

Your credit report.

Your stock portfolio.

Your bank balance.

Your team’s standings.

Yet chances are, your home is your biggest investment and perhaps even the cornerstone of your retirement plan.

But you have no idea what lurks in the file of your mortgage lender or its servicer.

Questions to ask the servicer

Where is the lender applying your payments?  To principal and interest?  To fees? Or is the money held in suspense?

Does the monthly mortgage statement you see match the records on the servicer’s computer?  You would assume so, but assume at your peril.

Got a mortgage modification?  Who knows what the lender’s records look like.  A client recently asked for a loan payoff and the response was off by $127,000! The full story.

You need to know what the servicer is doing with your payments soon enough to fix it.

  • While you still have records, and recollection.
  • While the loan is still serviced by the current folks.
  • While you have time to fix errors.

How lenders get away with theft

Nasty questions about your mortgage balance usually come up when time is short:  sale or refinance.

The payoff demand isn’t requested from the mortgage lender til the deal is about to close.  The rate lock on the enabling loan is set to expire.  The lender’s payoff demand comes in laden with unexplained fees and charges.

And you have no time to find out what’s in the demand without imperiling the deal.

While you can always pay the demand and dispute it later, that seldom seems to happen. Borrowers roll over and assume either the lender is right or it’s too difficult to get the real analysis of the payoff demand.

CFPB to the rescue

As part of the Dodd-Frank financial reforms, the Consumer Financial Protection Bureau has given homeowners a spanking new tool to keep track of their mortgage:  the Request for Information.

The Request for Information improves on the long-standing Qualified Written Request.  The QWR took too long, could only be sent to a single, designated address, and often required the borrower to know what was wrong with the accounting before writing.

A RFI allows you to simply ask questions:

  • what is the payoff balance of my loan
  • what is the principal balance of my loan
  • what fees, expenses or charges have been added to the loan
  • is any money held in suspense
  • how have you applied my payments

The servicer can set up a special address for such requests.  You can get that address from your mortgage statement; the servicer’s website; or by calling the servicer.  But you can’t make a Request for Information over the phone.

Your request has to be on paper separate from your payment coupon or mortgage statement.  Your letter should provide

  • address of your property
  • names of the borrowers on the loan
  • account number

The servicer must acknowledge receipt of your request within 5 business days, and provide responses within 30 business days.

The CFPB has a RFI fact sheet including a sample letter.

Ask annually

Make a mortgage checkup a yearly thing.  Pick a holiday or an event that you can associate with making a request for information.  Perhaps every year on the summer solstice, you make a request for information about your home mortgage.

Save the responses you get so you can compare this year to last year.  Are they consistent?  Any unexpected change?

After all, information is power.

More

How to claim a tax deduction for mortgage interest in your Chapter 13

Is your home equity an adequate retirement plan?

Understanding your mortgage statement

The one thing you must do before listing your home for sale

Image courtesy of  www.stockmonkeys.com

 

How 13 Works To Save Your House From Foreclosure

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save house

Saving a house from foreclosure is the single reason most people file bankruptcy.

Bankruptcy stops foreclosure- that’s a given.

But then what?

How can bankruptcy save the house,  rather than just putting off the inevitable loss?

The mortgage lender has a lien on the house, and liens aren’t discharged in bankruptcy.

So, how does bankruptcy help?  Meet Chapter 13 of the Bankruptcy Code.

Chapter 13 bankruptcy is the chapter of choice if your goal is to keep living in the house, as opposed to selling it to realize equity or to avoid the credit hit of a foreclosure.

Chapter 13 imposes a payment plan on lender

Baked in to Chapter 13 is the power to cure defaults on long term debts like mortgages.

Gone is the ability of the lender to refuse to take catch-up payments or to insist on cure in a single payment.

This is federal law, and the homeowner is at the helm of this ship. [Read more…]

Find The Lost Tax Deduction When Lender Misreports Mortgage Interest Paid

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How can you pay thousands of dollars in mortgage payments in a year, and get a  tax Form 1098 for a fraction of actual mortgage interest paid?

That’s what my client wanted to know.

His monthly mortgage payment is $2715.  The loan is currently interest only.  All the payments were made.

And yet, the Form 1098 from PNC says the year’s mortgage interest paid is only $1800.

So what happened to the other $30,780?  That’s a lot of money to go missing.

Welcome to the further screwed up world of mortgage loan servicing.

The short answer right now to the question I posed at the top is I don’t know yet.

But here’s what I suspect.

What servicer does with your payment

I’ll bet that PNC, the servicer I love to hate, has put the monthly payments in suspense, and has not posted them to the loan.

Federal law requires mortgage payments be posted the day of receipt

By holding them in suspense, they don’t show up as interest paid on the mortgage.

Why the payments were put in the suspense account I don’t know.

What it takes to get them out of suspense, we’ll have to see.

Getting your taxes right

My advice to the client and his tax preparer is to claim a deduction for all of the year’s mortgage payments.  It may conflict with the information provided by the servicer, but the servicer’s information doesn’t necessarily control.

If you don’t claim as large a deduction as you think you are entitled to, the IRS isn’t going to come back and urge you to correct an error that’s in their favor.

You may have to later convince the IRS that your calculation of the amount of interest you paid is correct and the servicer’s statement is wrong.  A copy of the monthly mortgage statement and a escrow analysis statement are a starting point.

Consider as well whether the same problem exists in prior years and if an amended tax return is worthwhile.

Lupe_MännchenTax sleuthing

In the meantime, I’m going to read the note and deed of trust that governs how the lender is supposed to credit payments.  Most security instruments set out the order in which payments are applied to amounts the borrower owes.

I’m hitting the RESPA regulations on suspense accounts and their use and misuse.

And then we’ll spring a Request for Information and a Notice of Error on the servicer.

I wonder how many other servicers will be outed when they produce palpably erroneous tax documents.

Related

Cancellation of debt and taxes

Tax deductions hidden in Chapter 13

Image of boxed money courtesy of Locomomo and Flickr

Get Tax Credit For Mortgage Interest Paid In Bankruptcy

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MORTAGE INTEREST DEDUCTION

Is your Chapter 13 plan  paying back mortgage payments that were delinquent when you filed bankruptcy?

If so, a tax deduction lurks, unclaimed, in the trustee’s records.

Track down that tax deduction and you reduce your federal income tax burden.

But it’s difficult because, for reasons I have not been able to figure out, the lenders don’t send IRS form 1098’s to either you or the trustee for mortgage interest paid through the plan.

So you don’t have proof that mortgage interest was paid, and neither does the IRS.

But, we can fix that.  I recently had occasion to walk a client through the process of figuring out the mortgage interest paid by the trustee.

I’ll retrace my steps and you can see how I figured out that he’d paid some $50,000 in mortgage interest  over the years of his plan that he hadn’t yet claimed on his taxes.

1.  Find the interest element in the lender’s proof of claim.

To be paid through a Chapter 13 plan, the lender must file a proof of claim on official form B410.  The mortgage attachment to that form, B410A has a line in Part 2 for “interest due”.

That line shows us what part of the missed payments, as of the filing of the bankruptcy case, was made up of mortgage interest.

2.  Calculate what percentage of the arrears is mortgage interest.

Part 3 of the mortgage attachment form breaks out the elements in the lender’s claim in the bankruptcy.  We need to know what fraction of the total claim the trustee will be paying is interest.

Take the “interest due” amount you located in Step 1 and divide it by the total at the foot of Part 3.

That’s the percentage of the total claim of the lender that’s interest.

3.  Access the Chapter 13 trustee’s site for payments to mortgage creditor

Chapter 13 trustees use different software to account for their operations.  You should have received information at the beginning of your case on accessing information about your payments and the trustee’s disbursements.

If you need help with the trustee’s web site, call the trustee’s office for help.

On the trustee’s site for your case, find the claim filed by the mortgage lender.  There should be a list of the date and amount of each payment made to the creditor on account of your mortgage arrears.

Total the payments for the last calendar year and multiple that total by the percentage of the claim that is interest, from Step 2 above.

Bingo! you have the number that represents what the trustee paid your creditor in mortgage interest for that calendar year.

Tax accounting rough and dirty

Your figure for mortgage interest paid in a year is an approximation.  By the end of the plan, the amount of interest paid will equal the amounts you’ve calculated this way.

The creditor may have applied it to your account differently.  Mortgage loan servicing is so erratic and inaccurate these days that it’s hard to tell.

If this calculation is off, it probably underestimates the amount of interest in the early payments from the trustee.  Most mortgages require the lender to apply payments first to interest, then to principal, then to expenses.  My experience is that they seldom follow the rules.

If anyone objects to your calculation, make them propose a better one.  Or make the recipient of the mortgage interest account for it in the usual way.

Save your work

Outside of bankruptcy, the lender would send you and the IRS a copy of their report on Form 1098 for mortgage interest you paid during the tax year.

We’ve done this sleuthing because they didn’t tell either the IRS or you what you paid in mortgage interest.

So, you may have to show the IRS how you got to a deduction that doesn’t appear in their records.

Print or save to pdf each of the documents you used to make your calculation.  You want to be able to support the deduction if challenged.

Another path to tax deduction

Alternatively, you could use the Request for Information process found in RESPA to ask the servicer of your loan how much interest you paid in a calendar year.

Servicers are required to provide answers about loan servicing within 30 business days of your request.  Requests must be in writing and contain identifying information.  More on how to make a Request for Information.

When tax professionals aren’t busy, see about amending prior returns.

Amend earlier returns

Federal tax law allows you to amend tax returns for three years from filing.  There’s an IRS publication for amending returns.

You can calculate what you paid through the Chapter 13 plan for prior tax years and amend those returns to claim this deduction.

Gather your calculator and get on the trail of these illusive, but valuable, mortgage interest deductions.

So You Keep Your Home Through Bankruptcy- What Then?

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California house underwaterWhat happens to your home after your bankruptcy case is over?

Most people who file bankruptcy are terrified that just filing bankruptcy will cost them their home.

They won’t let me keep my home, will they?

Sure they will.

The Chapter 7 bankruptcy trustee doesn’t want the house if there’s no value in it,  He’s looking for unencumbered value that can be paid to unsecured creditors.

The senior lender is content if you pay the mortgage.

But what about the junior lien, the HELOC, or line of credit loan, that is junior to the first mortgage?  That lien remains a valid encumbrance on the house, after the bankruptcy discharge.

If the house is underwater, as many California houses still are,  the junior lien is unlikely to foreclose.

Just like the trustee in bankruptcy, the junior lien holder understands there’s nothing there for them.

Now, at least.

Surviving lien

That underwater mortgage lien is like a leach:  it attaches to the house and it sucks up any appreciation that the house may enjoy.

Long silent junior liens are now foreclosing

If the market makes the house more valuable, that increase in value is available for the junior lien.

If the market stays the same, but you pay down the senior mortgage, more of the house’s value is available to secure the junior lien.

So, unless you do something, any improvement in the home’s price just benefits the HELOC.

Alternatives

If what you are paying on the first mortgage is comparable to rent, and you are content to never have equity in the house, you don’t need to do anything.  Just know that you’ll never be able to sell the house and put money in your pocket.

If the junior lien is totally underwater, consider filing a Chapter 13 to strip off the lien,  Or converting your open Chapter 7 to 13.

If the price of keeping the house is reasonable and you hope to build value for yourself in the property, you may want to try to buy out the junior lien.  There is a real appeal for some lenders in cash now.  They may not have the patience to wait for things to improve.

Make a plan for the house you are keeping after a bankruptcy.

More

Your to-do list after bankruptcy

How Chapter 13 helps you keep your house

Your credit report after bankruptcy

Image courtesy USGS.

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Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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