The client originally had his choice of bankruptcy chapters.
He could file Chapter 7, get quick relief, and put “everything” behind him.
Or his could file Chapter 13, propose a plan that would strip off liens and pay the taxes that would survive the Chapter 7.
He chose 7, and briskly got a discharge.
He forgot that the mortgage lender was a predator.
Return of the lien
Then he called me again. Seems that the Chase, holder of the junior lien on his house, sent him a letter about their lien and their continuing rights to foreclose. They had their sights on him.
Could they do that? he asked.
Could they? Sure. It’s a bankruptcy basic that liens survive a discharge, unless the bankruptcy judge orders otherwise. The lienholder couldn’t sue him for money, because he’d gotten a discharge, but they retained their lien rights, including the right to foreclose.
Would they? Not in a million years, on the numbers in his case. The house was underwater as to the senior lien. If the second place lien foreclosed, they acquire a property with the first lien still in place and then they owe the first a monthly payment.
Not going to happen.
Lien laying in wait
But, the second can sit there, waiting until either property values go up (a lot, in this case) or until he pays down the first. They can then grab the value created.
We offered the collection agency for Chase a couple thousand for the release of the lien. They wanted ten times that much.
The power of Chapter 13 then became crystal clear to my client.
Power of 13
In Chapter 13, the court can void the junior lien without any payment to Chase.
My client has income taxes that survived the Chapter 7 because they were too recent to discharge. He can pay pay the taxes and pay a chunk of his attorneys fees through the plan.
Chase doesn’t get to bargain or hold out. If the evidence shows Chase’s lien attaches to no value in the property, after calculating the balance owed to senior liens, Chase is wiped out.
It’s too bad that it takes a second bankruptcy case to accomplish this. But sometimes, these things don’t become clear until the dust settles.
Image courtesy of Flickr and orangejack.