BankruptcyLawyerHonolulu: Stop Foreclosure and Save Your Home by Filing a Chapter 13
Filing a Chapter 13 Bankruptcy will stop a pending foreclosure and you may be able to get rid of your second mortgage
By Attorney Brian Kawamoto
So long as you file your Chapter 13 bankruptcy petition before your scheduled auction date (a Chapter 7 filing may temporarily stop the foreclosure action but it will not help you to save your home from being sold later on) the automatic stay may help to save your home from foreclosure. It allows you to stretch out your delinquent balance and bring it current over the term of your plan. Lets say your home has equity that you can exempt, If you are behind on your mortgage payments for 6 months with a delinquent balance due of $12,000, you will have between 36 to 60 months in a Chapter 13 to cure your default and pay back the $12,000, which comes out to $200 per month if you propose a 60 month plan. Naturally, you must also continue to make the regular mortgage payments after you file your bankruptcy as the become due.
Getting rid of your second mortgage is possible: A 9th circuit court case allows bankruptcy debtors in Hawaii to get rid of certain second mortgages. Unfortunately this procedure may not be available to everyone as it will depend on what state you live in, as not every state follows this court ruling (each state has differerent court rulings when it comes to bankruptcy issues). That being said, if you live in Hawaii, and have a second mortgage or home equity loan (heloc) that is completely unsecured or underwater, then you can "strip off" (but not "strip down" see discussion below) this second mortgage by filing a motion to value collateral with the court. You will need to ask an attorney in your state to see whether this procedure is available to you. Once again if it is your home, your second mortgage or heloc must be completely unsecured, if it is partially secured and partially unsecured then you cannot strip it off. For example lets say your home is valued at $300,000 and you have two mortgages. The balance on the first mortgage is $325,000, and the balance on the second mortgage is $50,000. Since the second mortgage is completely unsecured or "under water", your Chapter 13 plan can provide for the stripping off of this second mortgage, thus your lender will receive whatever the other unsecured creditors will receive under your plan, so when you complete all of your required plan payments and get your discharge and better yet, you will no longer have a second mortgage to pay on your home. The case that allows you to do this in Hawaii is based on a 9th Circuit case, In re Zimmer (9th Cir. 2002) 313 F.3d 1220, 1222. If the second mortgage is partially secured (not completely under water) then you cannot strip it off. Also, if you file for Chapter 7 you cannot strip off a junior lien, said the U.S. Supreme Court in the Nobelman v. American Savings Bank case. If you are notified by your lender that an auction is scheduled (even if you are waiting for a loan modification response), seek an attorney's help right away and do not assume that your lender will postpone your auction. If on the other hand, your home has substantial equity and you are current on your mortgage pyament but are behind on your unsecured credit cards (all mortgage loans are fully secured and on top of that there is substantial equity that exceeds the amount that you can claim as exempt in Hawaii for your residence), here is where a Chapter 13 could be better than a Chapter 7. If you filed a Chapter 7 the trustee would liquidate your home, pay off the mortgages, then give you the exempt amount after he distributes the remaining monies (representing the unexempt equity) to your unsecured creditors. In a Chapter 13, you could keep your home provided that you pay the trustee this unexempt portion or the balance due on all of your debts (whichever is less) under your plan.
What if you have investment real estate? http://www.bankruptcylawnetwork.com/2010/02/26/chapter-13-can-save-an-investment-property-lien-stripping-in-action/ Totally different rules apply to investment real estate in Hawaii. Not only can you "strip off" a second mortgage that is totally underwater like you can for your residence, but you can also "strip down" your second mortgage even if it is only partially underwater. In addition, you could even "strip down" a FIRST mortgage too, if that loan is partially underwater to the value of the collateral, this would allow you to reduce your mortgage payments if the property is worth less than the mortgage balance since the secured portion would now be limited to the fair market value of the property and not the entire loan balance. The loan balance that exceeds the fair market value of the real estate would be treated as an unsecured claim and could be paid back at pennies on the dollar. Section 506 of the Bankruptcy Code provides provides for this "cram down" provision, it provides that a lien is only secured to the extent there is value in the asset to which it attaches. If a claim exceeds the value of the collateral, that portion of the claim is considered unsecured. As a result, in a Chapter 13 even voluntary liens like mortgages and trust deeds can be stripped down to the value of the collateral as it concerns investment real property (not your residence or home unfortunately). Bankruptcy code 11 USC 1322 (b)2 prohibits the stripping of liens for your residence but allows it for "a security interest in real property that is not the debtor's principal residence", so unless Congress changes the law in the future, it is what it is for now.
For additional reading material regarding other trending bankruptcy issues as well as other benefits of filing a Chapter 13, see http://bankruptcyhawaii.blogspot.com
If there is a perfected judgment on your home, you may need to strip it off in your bankruptcy, for more information on this topic, see http://hubpages.com/hub/BankruptcyHonolulu-Strip-off-a-Judgment-Liens-if-you-own-a-home
About the author
Attorney Brian Kawamoto is an experienced tax and bankruptcy attorney whose office and practice is located in Honolulu, Hawaii. As a former IRS Tax Attorney, he handles bankruptcy tax cases and also negotiates with the IRS on Offers in Compromise.
*For more information if you have IRS tax issues, see http://hubpages.com/hub/BankruptcyLawyerHonolulu-What-to-do-if-you-owe-IRS-taxes
It is advised that you find a bankruptcy attorney in your state when dealing with your individual situation as the bankruptcy laws are complex and changes from time to time, also every state has different laws, rulings and court decisions as it concerns bankruptcy matters. Statements made here reflects the author's viewpoint for general reading purposes only and therefore should not be relied upon or considered as a legal opinion or legal advice for your own particular factual situation. Each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue.