The news on the San Francisco Peninsula is echoing reports of rising home values.
That may seem like unmitigated good news.
It’s hard to see a genuine recovery in California without the housing market improving.
But rising home values may doom a once-in-a-generation chance for homeowners to shed the second mortgages and HELOCs that currently burden their homes by filing bankruptcy.
Chapter 13 provides a mechanism whereby homeowners can eliminate both the lien on their homes and their personal liability for junior liens.
To qualify to strip off a mortgage lien, there must be no value in the home to secure the junior lien. Put another way, the liens senior to the HELOC must total more than the value of the property at the time the bankruptcy case is filed.
For homeowners whose property tax liability and senior mortgage balance are close to today’s property value, a slight increase in property values can cut off the chance to get rid of the debt.
The cruel irony is that it may be a very long time before home prices increase enough for the homeowner to have equity in the property with the current liens in place. Homeowners on the cusp now may end up paying on the junior lien for decades before home values exceed the secured loan balances.
With tens or even hundreds of thousands of dollars at stake, it makes sense to consider whether Chapter 13 might be part of good financial planning.
Better than sliced bread
Chapter 13 is my favorite bankruptcy tool. It is voluntary, flexible, and powerful. A homeowner with a confirmed plan deals with few restrictions on their financial conduct during the plan. Make the monthly payment to the trustee and don’t borrow more money without the trustee’s consent. It’s not that hard.
There are lots of bankruptcy myths and misconceptions circulating: the biggest and most harmful one is that a Chapter 13 plan involves repaying all of your debts. Not so.
Chapter 13 plans may pay a tiny fraction of what’s owed on credit cards or medical bills. It is not unusual for a plan to pay nothing to general unsecured creditors.
You could reap the benefits of stripping a junior lien for years into the future. Isn’t there something better you could do with that money than pour it into an underwater house?
Image courtesy of wallyg.