It is devastating to feel that you can’t afford to be current with your mortgage payments. You worry about lenders’ harassment or foreclosure. Or maybe, tough financial times caused you to take second or third mortgages on your house. Irrespective of the situation, a Chapter 13 bankruptcy repayment plan can assist you in removing your junior liens as well as keep your home. San Diego Bankruptcy Attorney can assist in determining whether you are eligible to benefit from Chapter 13.
What is a Second or Third Mortgage?
Just like a first mortgage, a second or third mortgage is a loan that uses your house as collateral.
You possibly took out your loan to purchase your home. You can take out a junior lien simultaneously with the first. However, in most cases, a second and third mortgage occurs later and is based on the home’s equity. Equity is your home’s value minus the debt you have on your home.
Typically, homeowners take out junior liens to pay for things like:
- Consolidation of high-interest debts like credit cards
- Medical bills
- Home improvements
- College education
Some creditors use second and third mortgages to purchase an investment property. It is risky since a decline in real estate could reduce the worth of both assets. Getting a junior lien to purchase a motor vehicle or go for a family vacation is not advisable. Your house is on the line, and as a result, any expense which does not add value to the house or the household’s earning power must be considered cautiously.
Typical forms of second and third mortgages include:
- Home equity loan- It’s a one-time lump sum which is repaid at a fixed interest rate. It is a fifteen to thirty-year loan.
- A home equity line of credit (HELOC)- It is like a credit card. It carries a flexible interest rate, and while you repay the principal, the credit line revolves and could be reused. You obtain an account with a limit and can withdraw funds as you require them during the draw period. In the draw period, you can pay part or all of your balance, and you could be needed to make payments of interest. After the draw period elapses, you should repay the balance and interest.
What Happens if You Fail to be Current on your Second or Third Mortgage?
Your lender can decide to foreclose when you become delinquent on the mortgage, irrespective of whether the loan is your first, second, or third mortgage. If you fail to be current on a first mortgage, your lender will initiate a foreclosure proceeding.
If you default on your second or third mortgage, whether your creditor will start foreclosure or not will hinge on your home’s current value.
If your house is underwater (its value is lower than the money you are indebted to the first mortgage), the second or third mortgage is unsecured. In short, if the mortgage holder foreclosed, there would not be adequate proceeding from the foreclosure sale to pay the lender.
Typically, if you are underwater and fall behind on payments for the second or third mortgage, the lender of the second or third mortgage won’t start a foreclosure. It is because the money from the foreclosure sale will go to the senior creditor.
Home with Equity
If your home has equity, your second or third mortgage is partially secured. When you fail to pay your second or third mortgage, the mortgage holder could begin a foreclosure. It is because the creditor will recover all or part of the money after the asset is foreclosed.
In other words, the more equity there is in the home, the higher the chances that the second or third mortgage lender will foreclosure.
How Chapter 13 Bankruptcy Can Assist in Removing Second and Third Mortgages
In most cases, borrowers in Chapter 13 cases have several loans on one home. It is also common for the home to be underwater. While it seems unbelievable, bankruptcy allows you to remove all the junior mortgages and keep your house.
You can achieve this by bringing a lien stripping motion to a bankruptcy court. If granted, you can save a lot of money because after completing the repayment plan, your second and third loans’ balance will be removed.
Secured Mortgage Should be Cleared Fully
When you get a mortgage, you give your lender a security interest or lien in your home. The lien permits the creditor to foreclose should you stop paying the loan. To keep the home, you should remain current after and throughout Chapter 13 bankruptcy. It is because you are still accountable for your outstanding mortgage loan until it is paid.
You Pay Unsecured Lender the Disposable Income
You are not supposed to pay nonpriority secured claims like medical bills and credit card bills in bankruptcy. Unsecured lenders get disposable income since they wait until your priority claims, living expenses, and secured debts are paid. Usually, unsecured lenders recover a portion of the balance. After completing the repayment plan, the remaining balance is discharged (wiped out).
Liens You Can Eliminate Using Chapter 13 Bankruptcy
Lien stripping permits you to remove wholly unsecured liens on the property. When lien or mortgage is on a home, usually, its priority is determined by when the mortgage was recorded.
That means an earlier mortgage has priority over subsequent mortgages. Therefore, if your home is foreclosed, the first lender will receive payment from the sale proceeds before your second lender.
If you owed more on the second lien than your home’s value, the second lender would not receive anything from the sale proceeds. It is because there is nothing left after clearing the first loan. If the lender fails to get any money, the second lien is well-thought-out to be wholly unsecured and could be removed through Chapter 13.
Your stripped liens will be treated the same way as unsecured debts. Usually, the debts receive nothing or little money and are wiped out at the case completion.
Lien Stripping Eligibility
Converting your secured second or third loan to unsecured debt is sensible. If successful, the second and third mortgages will be removed together with other unsecured debts. Lien stripping in Chapter 13 involves two requirements:
Your Junior Mortgage Should be Underwater or Upside-down
To strip your lien, you will bring a motion in a bankruptcy court, requesting the court to decide the following concerning your house’s value:
- The worth of your home is lower than what you’re indebted (It’s underwater or upside-down)
- Should you sell your house, there would be no proceeds to clear the second and third mortgage
If you are successful, the court will declare your second or third mortgage unsecured and ask the bankruptcy trustee to treat your junior liens as unsecured debts rather than secured debts. That means the money available to unsecured lenders in the bankruptcy will pay the junior mortgage creditor.
For instance, assume your home’s value is four hundred thousand dollars, and you’ve a four hundred and fifty thousand dollars first mortgage and eighty thousand dollars second mortgage. Because the first mortgage is larger than the value of your home, you could strip the second lien.
Likewise, if you have a third loan whose worth is fifty thousand dollars, in the example above, you can also remove the third mortgage.
However, if the value of your home was four hundred and seventy-five thousand dollars, you can’t strip the second mortgage. It is because your home equity is above the first mortgage. Since the joint balance of the junior liens (five hundred and thirty thousand dollars) is greater than the home’s value, you could strip the third mortgage.
You Should Finish the Repayment Plan
Another requirement for lien stripping is finishing the repayment plan. Should you miss payment while the repayment plan is effective, the judge will dismiss the case, and the loan will remain effective, attached to your home, until you clear the loan. You will obtain credit for the amount paid on the account during the bankruptcy period.
When Will Your Junior Liens Go Away?
As previously noted, the junior liens you strip are considered non-priority unsecured debts once you file bankruptcy. Like credit card or medical debt in a Chapter 13 case, you do not have to pay the debt outside the bankruptcy. Instead, you’ll pay a part of the unsecured debt through the Chapter 13 repayment plan. After you complete the plan, anything left on your mortgage is wiped out.
That means when you bring Chapter 13 bankruptcy, you immediately get the benefit of not having to pay the junior lien. It is worth noting that the junior lien won’t be removed from the home until you finish the repayment plan and acquire a discharge. Should the case get dismissed before completing the bankruptcy plan, the junior lien won’t be stripped.
What is Chapter 13?
Chapter 13 allows you to restructure your overwhelming debts and set up a repayment plan of three to five years.
It is also known as wage earners bankruptcy. It is because the debtors should have a regular income to be eligible. The aim is to clear some debts and be current on secured loans like car loans or mortgages.
Chapter 13 Eligibility
Any person with regular income can bring Chapter 13, provided the debt is within the California threshold. Additionally, your income level assists in determining your repayment plan timeline.
If the income is above California’s median level, you will repay the debts for five years. If the income is below the median level, you will have a three-year repayment plan.
Here are Chapter 13 qualifications:
- You should have a regular income.
- You should submit recent tax payments and returns.
- You should not have had your bankruptcy dismissed within six months for failing to adhere to or show up in bankruptcy court.
- Your unsecured debts and secured debts should not be above $394,725 and $ 1,184,200, respectively.
- To obtain a discharge, you should not have obtained the discharge from Chapter 7 within the past four (4) years or Chapter 13 within the last two years.
How to File a Chapter 13 Case
Before filing for bankruptcy, make sure you meet with a bankruptcy lawyer and a credit counselor from a credit counseling firm. These consultations will assist in understanding your circumstances as well as determining whether bankruptcy will help you get the finances on track.
The attorney will also work to establish the qualification for debts reorganization to a trustee. You will receive court approval of your repayment plan.
Here is are the steps of filing for a Chapter 13 case:
- Complete credit counseling within six months before filing
- Prepare paperwork- An attorney should be able to assist you with getting the following:
- Highlight your creditors and the amount of money you owe each
- Proof of your income
- A tax return
- List of valuables and property
- A certificate of credit counseling course
- Bring a bankruptcy petition alongside a fee of three hundred and ten dollars with the court. The petition will put on hold all debt responsibilities.
- Present your plan within fourteen days of bringing your petition. Your repayment plan should give details on how you will repay your debts. Make sure you start following your plan within thirty days after filing your case, even when the court has not approved the plan yet.
- A trustee will be assigned to meet and review with lenders.
- The trustee will schedule a meeting with creditors between twenty-one and fifty days after filing your petition. During the meeting, you will answer questions about your proposed plan and debts.
- Appear in a confirmation meeting within forty-five days following your creditor meeting. The judge will determine whether to approve your plan or not.
- Adhere to your repayment plan
- Your bankruptcy will be discharged
Removing Second and Third Mortgages Without an Attorney
Engaging a bankruptcy attorney to represent you can be expensive. However, representing yourself can be difficult.
According to a research conducted by Bankruptcy Court for the Central District of California, Chapter 13 cases filed without a lawyer are approved in less than one percent. Even an experienced lawyer usually needs to amend a plan to have it approved and realize their client’s goals.
Also, should you fail, it could affect the ability to file bankruptcy in the future.
What Does Representing Yourself Mean?
When you represent yourself, you should research the law, follow bankruptcy court laws and rules, prepare and file all the documents, and make decisions concerning your case.
Please note, the appointed trustee isn’t your attorney. It is illegal for the trustee to offer you legal advice. As a result, the trustee will not respond to your emails or calls requesting assistance with the case. The trustee will only tell you the plan isn’t in line with the local procedure or rules but will not rectify the problem.
Another stumbling block for a self-representing party is offering the required notice to lenders when hearing is scheduled, or paperwork has been filed. Knowing how, when, and to whom to serve the notice isn’t easy. Typically, the court will not rule in your favor on issues that haven’t been properly noticed.
Moreover, when seeking lien stripping, you should file the necessary motions with the bankruptcy court and appear in court. Should a lender object, the matter will be scheduled for an evidentiary hearing where you should provide witness testimony and evidence. Although judges are patient with pro se debtors, every party should adhere to the evidentiary rules.
The Impact of Case Failure
If you’re unsuccessful, the bankruptcy court will dismiss the case. Should it occur, you could end up wasting time, creditors annoyed with the delay, late charges may accrue, and additional interest.
Frequently Asked Questions
Discussed below are some of the most commonly asked questions about bankruptcy and removing second and third mortgages:
- Is Lien Stripping Available in Chapter 7?
While many courts only permit lien stripping in Chapter 13, according to the 11th Circuit removing second and third mortgages is available in Chapter 7. In some states, debtors may soon be able to get relief from junior liens that surpass their home’s value using Chapter 7.
Nevertheless, California is in the 9th Circuit that hasn’t any rule that allows lien stripping using Chapter 7.
- Why You Cannot Strip Your Junior Lien Using Chapter 7?
Even though filing for a Chapter 7 case wipes out the responsibility to clear the loan, it does not remove the mortgage lien. If it did, every person could bring the case and then own the house free. Consequently, if you want to keep the house, you should continue making timely payments or file for a Chapter 13 case and catch up with your arrears.
Find a Competent Bankruptcy Attorney Near Me
Lien stripping is one of the major benefits of a Chapter 13 case. With house values dropping, mortgages are quickly becoming more than the fair market value of a home. Although lien stripping permits you to remove your second and third mortgages, it is a complicated law that requires the assistance of a knowledgeable bankruptcy lawyer. With many years of experience, attorneys at San Diego Bankruptcy Attorney can assist you in lien stripping and Chapter 13 filing. Call us today at 619-488-6168 to learn more about our outstanding services.