Chapter 13

Chapter 13

Can you get rid of a second mortgage by filing bankruptcy?

There is no doubt about it, we are living in an interesting time. One of the few advantages of a down economy is that, under the proper circumstances, people with two mortgages can actually eliminate their second mortgage through a Chapter 13 bankruptcy. Getting rid of a second mortgage, also known as “lien stripping” or “lien avoidance”, can be done when the value of the property is less than the value of the first mortgage.

The logic is simple. In a bankruptcy, there are “secured” and “unsecured” creditors. A secured creditor has collateral securing its loan, while an unsecured creditor does not. A mortgage company is a secured creditor because it secured the loan with the house.

A credit card company would be an unsecured creditor because it has no collateral securing its loan. When people file a Chapter 13 bankruptcy, they must repay the past mortgage arrears 100%. Unsecured creditors may not be getting 100% of their debt paid. When the case is over, any debt owed to an unsecured creditor is discharged.

To get rid of the second mortgage, an attorney files a Motion with the Court asking to “avoid” the second mortgage. The basis for filing is that under the law if there is no equity for the second mortgage, the second mortgage may be avoided. If the Court agrees with the Motion, it moves the second mortgage from the “secured” column to the “unsecured” column.

When the bankruptcy is over, the second mortgage gets wiped out along with the credit cards and other unsecured debt. The Order avoiding the second mortgage and the discharge from bankruptcy must be recorded in the Land Records where the property is located.

It is important to understand all options available before taking the step of filing a bankruptcy. Nobody wants to file a bankruptcy, but if you do file, make sure you only have to do it once. An attorney can assist in maximizing the benefits.

How Much Will My Chapter 13 Payment Be?

One of the most common questions asked, and the most important to many who file Chapter 13 bankruptcy is, “how much will the payment be?” The answer is not as simple as it would seem. Under the Bankruptcy Code, a debtor must devote his or her projected “disposable income” over the three or five year payment plan.

In order to make this determination, the Court looks to a calculation based on the debtor’s household’s income and expenses.

First, a debtor lists all of his or her household’s income, based on all income sources, including wages, investment income, pension income, rent, etc. Next, the debtor lists all of his or her reasonable expenses, including food, mortgage payments or rent, gas, electricity, insurance, and other expenses. These expenses must be reasonable and verifiable.

Many expenses, such as luxury vehicles, private school, and savings contributions must be cut. Once these expenses are subtracted from the income, the remaining money is dedicated to the Chapter 13 Plan.

The Court may also look to a complicated “means test” that is filed by the debtor, to determine the amount a debtor must pay.

If a debtor files Chapter 13 to pay arrears on secured debts, the full arrearage must be paid back to the lender, regardless of whether this amount would make the payment higher than what the income and expenses say the debtor can afford.

There are also fees and trustee commissions that must be paid in the Chapter 13 Plan. Unsecured creditors should also get some distribution, even if it is minimal.

A good lawyer knows how the income and expenses should be stated to make sure the debtor has a Chapter 13 payment that is feasible. Many times when a person files on their own (also know as “pro se”) they do not do a good accounting of expenses, which results in an excessively high plan payment.

An experienced attorney knows where to look and what questions to ask to make sure legitimate expenses are not missed.