Stripping the Lien, Cram Down or Strip Down of a 2nd Mortgage

Stripping the Lien, Cram Down or Strip Down

When a judge removes the second mortgage or grants an “Avoid Lien Motion” during bankruptcy proceedings it is referred to as “stripping” the lien, a“cram down” or “strip down.”

This can happen if the loan is secured by other collateral that is part of the bankruptcy filing or if the home is not your principal residence or even if the payment structure on the second mortgage falls heavily during the bankruptcy filing period itself.

Here is a Lien Stripping Example:

• Home is worth $300,000.
• The first mortgage is $400,000.
• A second mortgage (or in certain states, a deed of trust) for $100,000.
• Lenders are only secured up to the value of the property. In this case the first lender is secured by the property value.
• The second lender has nothing securing their lien. They are unsecured because the property has no value left over from the first lien. In a Chapter 13, you can lien strip the second lender.
• The second lien is treated as an unsecured creditor.  ( Just like a credit card )
• Most likely the second lender will not be able to collect on the mortgage after the bankruptcy discharge and the homeowners (debtors) still get to keep the house.
• The homeowner would not even have to pay the lien when they sell the house.
• Now, THIS IS A POWERFUL tool for homeowners who are underwater!

Additional liens on your home beyond your initial mortgage, whether you have taken a second mortgage or just another related lien, could be negated in the case of a Chapter 13 personal bankruptcy filing.

Liens can be stripped off of the debtor’s assets in Chapter 11 or Chapter 13 when there is not enough equity in the asset, after deducting senior liens from the property’s current market value, to secure the unsecured in whole or in part, where the lien exceeds the value of the debtor’s property. Section 506 of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. To the extent that the claim exceeds the value of the collateral, that portion of the claim is unsecured. In Chapter 11 or Chapter 13, even voluntary liens, such as mortgages and security interests, can be stripped down to the value of the collateral, with the exception of voluntary liens secured only by the debtor’s residence. Congress is currently considering changes to bankruptcy law allowing the modification of home mortgages.

Despite the general rule, two exceptions may apply so as to allow lien stripping of a mortgage on a personal residence: loans based on a home plus other collateral.

• Lien stripping is prevented only when the lien is secured “solely” by a personal residence.

Court decisions have made it clear that when the debtor has given other collateral (in addition to the personal residence; e.g., office equipment) as security for the mortgage, lien stripping will be allowed. Thus, if you will be taking out a second mortgage or refinancing your home, you should consider offering additional collateral, such as furniture, as security for the loan. This can be done under the guise of seeking better terms from the lender, such as a lower interest rate.

Many (but not all) bankruptcy courts follow a rule that makes a second mortgage totally unsecured if the first mortgage balance equals or exceeds the value of the personal residence. This exception will not apply in the case of a refinancing of a mortgage, since in a refinancing the new mortgage pays off the first mortgage.

The exception is predicated on there being two distinct mortgages (a first and a second mortgage).

For this reason, if you have the option of financing your business through a second mortgage or refinancing your first mortgage, the second mortgage may be the better choice, especially where the amount of the first mortgage is close to the value of the home.

What’s My Chapter 13 Bankruptcy Monthly Plan Payment Going to Be?

When a client is considering filing for CH13 bankruptcy, one of the first questions asked is, “What will my CH13 Plan payment be”?

I almost always answer, “I don’t know yet.”

Why? Because of the complex way plan payments are determined.

There is a four-part test.

Unfortunately, after running all of the tests, you pick the one resulting in the highest payment.

Test No. 1: The Means Test. The Means Test was first imposed by Congress as part of the 2005 Bankruptcy Code Amendments. It replaced the case-by-case evaluation of actual ability to pay with an arithmetical formula that often has nothing to do with the debtor’s actual ability to pay. Almost universally panned as a failure, this test is nevertheless a legal requirement that must be complied with. I can’t tell you what the Means Test requires as a payment until after I’ve crunched all of the numbers, something I can’t do at the initial consultation.

Test No. 2: The Chapter 7 Liquidation Analysis Test. If your unsecured creditors would receive money from the sale of your non-exempt assets were your case a CH7 they have to get at least as much through your Chapter7 Plan.

For example, if you have $20,000 in net, non-exempt equity in your house, the CH13 Plan would have to provide for at least $20,000 in payments to your unsecured creditors.

Test No. 3: The Disposable Income Test. Take your net income (after taxes and other allowable deductions). Subtract your allowable expenses. If the number is positive, that’s what you have to pay your creditors on a monthly basis. Sometimes called the “I Minus J Test,” because Schedule I lists income and Schedule J expenses, this test comes closest to reflecting your actual ability to make the CH13 Plan payment.

Test No. 4: The Required Payments Test. You have to pay administrative expenses, such as legal fees and CH13 Trustee commissions, in full through the CH13 Plan. You have to pay all priority debt, such as domestic support obligations and certain taxes, in full. You have to pay the amounts necessary to cure mortgage and car arrearages. Add all these up, and that’s the minimum that must be paid under the Plan.

Note that tests 1 and 4 have nothing to do with your actual ability to pay.

California Bankruptcy Exemptions

 

NEWS FLASH! On January 1, 2010 homestead exemptions rose to $75,000 and $100,000 of home equity for single and married debtors.

Federal Exemptions Not Allowed
Exemptions updated to include changes effective January 1, 2010.
California has 2 ‘systems’ of bankruptcy exemptions.
You must choose one. Each has different exemption provisions.
California Bankruptcy Exemptions – System # 1

 
Real or personal Property you occupy including a mobile home, boat, stock cooperative, community apartment, planned development or condo to $75,000.00 if single and not disabled; $100,000.00 for families if no other member has a homestead; $150,000 if age 65 or older, or physically or mentally disabled; $100,000 if 55 or older, single and earn under $15,000 or married and earn under $20,000 and creditors seek to force the sale of your home; sale proceeds exempt for 6 months after received (husband and wife may not double the amount and may file a homestead declaration.  $75,000
Insurance:

• Disability or health benefits
• Fraternal unemployment bonds
• Life insurance proceeds or avails if clause prohibits proceeds from being used to pay beneficiary’s creditors
• Fidelity bonds
• Homeowners’ insurance proceeds for 6 months after received, to homestead exemption amount
• Matured life insurance benefits needed for support
• Unmatured life insurance policy loan value to
$10,775 husband and wife may double to $21,550

 

Pensions•

  County employees
• County firefighters
• County peace officers
• Private retirement benefits, including IRA’s and KEOGHS
• Public employees
• Public Retirement benefits

 

Miscellaneous

 
• Property of business partnership
• Business or professional license, except liquor licenses
• Inmates’ trust funds to $1,350 (husband and wife may not double)
 

Personal Property

 
• Appliances, furnishings, clothing and food needed
• Bank deposits from Social Security Administration to $2,700 ($4,050 for husband and wife.
Note on Social Security:
Bank accounts which receive direct deposits from Social Security are exempt without making a claim if they have $2,700 or less (if one depositor is designated payee) or $4,050 (if two or more depositors are designated payees). Balances over the designated amount are completely exempt as long as traceable to Social Security.
• Building materials to $2,700 to repair or improve home (husband and wife may not double amount)
• Burial Plot
• Health aids
• Jewelry, heirlooms and art to $6,750 total (may not be doubled)
• Motor vehicles to $2,550 in auto insurance if vehicle(s) lost, damaged or destroyed (may not be doubled)
• Personal injury causes of action
• Personal injury recoveries needed for support; if receiving installments at least 75%
• Wrongful death causes of action
• Wrongful death recoveries needed for support; if receiving installments, at least 75%
Public Benefits

 
• Aid to blind, aged, disabled, AFDC (Aid to Families with Dependant Children)
• Financial Aid to Students
• Relocation benefits
• Union benefits due to labor dispute
• Unemployment benefits
• Worker’s Compensation
Tools of Trade

 
• Tools, implements, materials, instruments, uniforms, books, furnishings, equipment, vessel, motor vehicle to $6,750 total (Motor vehicle limited to $4,850); to $13,475 total (Motor vehicle limited to $9,700) if used by both spouses in same occupation (cannot claim motor vehicle under both tools of trade exemption and motor vehicle exemption.

 

Wages

 
• Public employees vacation credits; if receiving installments, at least 75%
• 75% of wages paid within 30 days of filing for bankruptcy
NOTE:

These are the major bankruptcy exemptions.
Check with your bankruptcy lawyer for a full exemptions list.
California Bankruptcy Exemptions – System # 2
Homestead – Unused portion of homestead may be applied to any property.  $20,725
 

Insurance:

 
• Disability or health benefits
• Life insurance proceeds or avails needed for support
• Unmatured life insurance contract accrued avails to $11,075
• Unmatured life insurance policy other than credit
 

Miscellaneous

 
• Alimony, child support needed for support
Pensions

 
• ERISA qualified benefits needed for support
Personal Property
• Animals, crops, appliances, furnishings, household goods, books, musical instruments and clothing to $525 per item
• Burial plot to $20,725, in lieu of homestead
• Health Aids
• Jewelry to $1,350
• Motor vehicle to $3,300
• Personal injury recoveries to $20,775 (not to include pain and suffering or pecuniary loss)
• Wrongful death recoveries needed for support
 

Public Benefits

• Crime victims’ compensation
• Public Assistance
• Social Security
• Unemployment benefits
• Veterans’ benefits
Tools of Trade $2,075

Wild Card

• $1,100 of any property plus unused portion of homestead or burial exemption of any property.

Total wildcard = $21,825 ( Can be used and applied as needed )

NOTE: These are the major bankruptcy exemptions.
Check with your bankruptcy lawyer for a full exemptions list.
Homesteads:

• The exemption for a homestead is limited to $125,000 if the property was acquired within the previous 1215 day (3.3 years). The cap is not applicable to any interest transferred from a debtor’s previous principal residence (which was acquired prior to the beginning of such 1215-day period) ;
• The value of the state homestead exemption is reduced by any addition to the value brought about on account of a disposition of nonexempt property made by the debtor (made with the intent to hinder, delay, or defraud creditors) during the 10 years prior to the bankruptcy filing.
• An absolute $125,000 homestead cap applies if either:
o the court determines that the debtor has beeen convicted of a felony demonstrating that the filing of the case was a abuse of the provision of the Bankruptcy Code; or
o the debtor owes a debt arising from a violation of federal or state securities laws, fiduciary fraud, racketeering, or crimes or intentional torts that caused serious bodily injury or death in the preceeding 5 years. NOTE: This limitation is inapplicable if the homestead property is “reasonably necessary for the support of the debtor and any dependent of the debtor.”

The state you use for your exemptions is:

• The state you lived in for the 730 days (2 years) before filing; or
• If you did not live in a single state in the previous 2 years you use the state where you lived the majority of the 180 period preceding the 2 year period; or
• If the preceding renders you ineligible for any exemptions then the debtor is allowed to choose the federal exemptions.
Pension Plans exempt from seizure:
Employee contributions to ERISA qualified retirement plans, deferred compensation plans, tax-deferred annuities, and health insurance plans.
Education Funds exempt from seizure:

Funds placed in an educational retirement account or qualified State tuition programs at least 365 days prior to a bankruptcy filing, within the limits established by the Internal Revenue Code, and for the benefit of a child or grandchild of the debtor, are excluded from the debtor’s estate, with a $5,000 limit on funds contributed between one and two years before the filing.

2nd Mortgage Stripdowns

With the economy currently in  recession, many homeowners are struggling to make their house payments.

With layoffs  beginning to pick up steam, many people are losing their jobs.

• If you lose your job and find you aren’t making enough money to pay your monthly bills, you may qualify for a Chapter 7 or Chapter 13 Filing.

To determine if you qualify for a bankruptcy under Chapter 7, you will need to complete a “Means Test” where your monthly income for the last 6 months is measured against the median incomes for your state. If your income falls below the median income in your state, you may be able to proceed with a Chapter 7 bankruptcy filing.

If you file for Chapter 13 bankruptcy and own a home with a 2nd mortgage, you may be able to get that 2nd mortgage deemed as an unsecured debt.

If the value of your home is less than the value of your first mortgage, your second mortgage can be classified as unsecured and paid off in as little as three years.

Upon successful completion of your Chapter 13 plan, you will be discharged of all your credit card debt, medical bills, and 2nd mortgage!!!.

Homeowners with mortgages that are contemplating bankruptcy should consult with a lawyer so they know all their options. Not everyone is going to be able to qualify for a “strip down”, but it’s in your best interest to know that it exists.

Consult with a professional and you can turn your financial situation around and move on to restoring your credit as you come out of bankruptcy.

I can help you find a good attorney.

Bankruptcy and Loan Modification

Homeowners in the US have never had it so bad, as currently. The global and domestic economic crisis has indeed hit so many millions of people like a ton of bricks. On one hand, they had taken loans, some of them quite substantial and on the other hand, layoffs had adversely affected their ability to repay loans. This has increased the requirement for bankruptcy and loan modification as so many people are under threat of going down under a mountain of loan woes.

When people are faced with mounting bills to pay and the prospect of reduced earnings, they become faced with the possibility of insolvency and begin to renege on their payment commitments to the bank or the lending institution. This is when the process of bankruptcy and loan modification kicks in, especially when borrowers do not have direct recourse to renegotiation of loans or mortgages. The first resort of people is to approach an attorney to make a pitch for loan modification through a formal loan modification. Loan medication makes an appeal to the lender to either reduce the balance payment in line with the true lower value of the property, increase the tenure or lower the interest rates, so that the borrower can try to make good the payment on the revised terms. This involves presentation of the incomes and expenses statement with documentary proof to the lender, to make a request for revised terms of the loan.

In case the lending institution turns down the appeal for loan modification, the homeowner can go in for filing for bankruptcy under the provisions of US Bankruptcy law. There are provisions under Chapter 7 and Chapter 13 of the bankruptcy law, whereby a borrower can either liquidate assets to pay off debts and e clear within 4 months or else accept a 3- 5 year tenure of financial discipline so as to retain the assets while paying off the debt. In any case, bankruptcy and loan modification are options that one has to consider given the unique conditions and merits of each individual case.

Chapter 7 Liquidation

A Chapter 7 bankruptcy filing will result in the discharge of most types of debt including credit card balances, medical bills and finance company loans. Certain debts such as student loans, recent cash advances, domestic support obligations, and monies procured by fraud will not be discharged.

An individual with primarily consumer debts is eligible to receive a Chapter 7 discharge if his or her average monthly income for the past six months is less than the California Median or if his or her income is above the California Median and his or her qualified deductions place his or her income beneath the disposable income threshold. Additionally, an individual may not receive a Chapter 7 discharge if he or she has received a previous discharge under Chapter 7 in the previous eight years.

Once a debtor files a Chapter 7 petition, all collection activity must cease and any creditor attempting to collect a debt can be sanctioned by the court. Approximately 30 days after the petition is filed, a meeting of creditors (“341(a) meeting) is held with the trustee. This meeting is used by the trustee to ask the debtor questions about the debtor’s financial affairs and accuracy of the petition. Creditors have the right to be present and ask questions, however it is extremely rare for a creditor to appear. The meeting usually lasts less than five minutes. After the conclusion of the meeting, if there are no objections, the debtor will receive his or her discharge about two months after the 341(a) meeting.

The court costs to file a Chapter 7 case are $299 which must be paid by you when the case is filed. The attorneys fees we will charge for a Chapter 7 petition vary on the complexity of the case, however our fees are very competitive and we offer installment plans which make payment easy and affordable.

Call me and we can set up a free consultation!

714-882-9255

Re-Affirmations in a Chapter 7

Much has been written already about reaffirmation agreements and this blog will not cover any new ground, but will provide a quick explanation for potential bankruptcy clients.

A reaffirmation agreement is a contract entered into during the pendency of (usually) a Chapter 7 bankruptcy case which stops the particular debt from being discharged. In other words, it creates an obligation to repay that debt after the bankruptcy case is completed.

Is reaffirming a debt a ever a good idea? This is a tough question to answer.

Typically, only secured debts are reaffirmed in order to allow the debtor to retain the collateral. Under the amendments to the Bankruptcy Code which took effect in 2005 (BAPCPA), secured creditors can treat the filing of the bankruptcy as a default and use that as a basis to repossess their collateral (such as an automobile) after the bankruptcy case is over, if applicable state law allows it. As a result, the only sure way to keep a secured motor vehicle or other personal property is to enter into a reaffirmation agreement.

However, there is a big downside to reaffirmation agreements, namely that if you fail to make the required payments, not only can the creditor repossess its collateral, but the debtor will also owe whatever is left on the balance of the reaffirmed debt. It is for this reason, among many others, that most attorneys advise against doing reaffirmation agreements.

There are a few saving graces, however. First, as far as vehicles go, the majority of vehicle creditors will allow debtors to just stay current and maintain their payments without entering into a reaffirmation agreement. Second, there is at lease an argument to be made for merely attempting a reaffirmation agreement and if the judge denies it, then the debtor should be able to retain the collateral and make payments because they have done all that is required of them by the bankruptcy code.

There may be reasons to reaffirm smaller debts, such as with credit unions in order to retain future credit privileges with them, but as always you need to get advice on your specific situation from your bankruptcy attorney.

Removing Judgments in a BK!

A major source of confusion among people who file for bankruptcy is whether debts on which there is a judgment or lien can be removed (discharged) in a bankruptcy case.

Whether a debt is dischargeable or not depends on the type of debt it is, and how it was incurred. For example, debts incurred through fraud are not dischargeable. Neither are certain tax debts or student loans. For more information on this, call me: 714-882-9255

It is important to understand that a judgment and a lien are not the same thing. A judgment is a court order either fixing liability and an amount owed, or ordering someone to do something. A lien is the creation of a security interest against an asset or assets, giving the judgment creditor rights against that asset (such as real estate, or a bank account, or wage garnishment). How much of a right to collect depends on the equity in the asset and if any senior creditors (such as a mortgage holder on real estate) are present.

A judgment lien is not automatic. First, the creditor must obtain a judgment from the court. Then, to create a lien, it must be perfected under applicable non-bankruptcy law (usually the State or county in which the asset is located). For real estate, this usually involves obtaining a certified abstract of the judgment from the court that issued it, and recording it with the county recorder’s office wherever the property is located that the creditor wants the lien to attach.

So, can one get rid of (avoid) a judgment lien in a bankruptcy case? If certain requirements are met, yes. The bankruptcy code section that states this is 11 U.S.C. 522(f), which allows a lien to be removed to the extent that it impairs an exemption to which the debtor would have been entitled in the absence of the lien. This is basically a mathematical calculation, and depends of course on the value of the asset, the amount of any senior liens, and the amount of the available exemptions (usually governed by the laws of the State where the bankruptcy case is filed, but not always).

The bottom line is that if you have a creditor who has obtained a judgment lien against you, be sure to tell your bankruptcy attorney so he/she can assess whether or not it can be removable in your case. This can also be done after your bankruptcy case is over, but there are limits and it requires additional legal fees to reopen your bankruptcy case.

What if you forget to list a creditor?

What happens if a debtor forgets to list one or more creditors on their bankruptcy papers? ( Petition )

The answer varies depending on where your case is filed and what chapter of bankruptcy was filed, as well as some other factors.

In the 9th Circuit (which includes California, Oregon, Arizona, Washington and Nevada, Idaho, Alaska, Hawaii and Guam) if your case was a Chapter 7 bankruptcy in which no assets were liquidated and sold by the Trustee, and you receive your discharge, there is no consequence for unintentionally failing to list a creditor. Thus, if you get your discharge, you are discharged from ALL dischargeable debts regardless of whether they were listed or received notice of the bankruptcy. The two main cases on this are In re Neilsen, 383 F.2d 922 (9th Cir. 2004) and In re Beezley, 994 F.2d 1433 (9th Cir. 1993).

(If the creditor in question has grounds to object to the discharge of the debt– for example, if the debt was incurred through fraud– they can still move to reopen the Chapter 7 case and litigate their nondischargeability claim if they received no notice of the original bankruptcy).

In a Chapter 11, Chapter 13 case or in a Chapter 7 case where assets are being distributed by the Trustee, the failure to list a creditor is more serious and can result in that debt not being discharged.

If your case is filed outside the 9th Circuit, you should consult with a bankruptcy attorney in your area regarding the law in your jurisdiction.

Credit Counseling

I write this to clarify misconceptions regarding the required credit counseling prerequisite to filing a bankruptcy case.

One of the requirements of the new bankruptcy law that went into effect in October 2005 is that all individual debtors filing a bankruptcy case must complete a credit counseling course by a certified company within six months prior to filing their bankruptcy case.

Recently I have received a number of comments from potential clients telling me that they were informed that they had to complete the credit counseling course, then wait six months before they can file their bankruptcy case. This is completely untrue.

The certificate for a completed credit counseling course is valid for 6 months.

If for some reason you obtain a certificate and do not file your bankruptcy case (Chapter 7, Chapter 13 or Chapter 11) within 6 months, then you need to take the course again and obtain another certificate.

The course itself probably takes about an hour or so to complete. Many credit counseling agencies allow this to be done online.

There is another financial management course which Congress requires debtors to take AFTER the bankruptcy case is filed. This is a prerequisite to obtaining a discharge of debts. This financial management course (also called a debt management course) takes a similar amount of time as the credit counseling course to complete and can also be done online in many instances.

Call me and I can direct you to a few sources to get your certificate!

714-882-9255