Lein Strip Tax Consequences

[TooMuchCredit]

If you strip a 2nd, you lose the interest deduction for tax purposes.

When you file and intend to strip do you file as if you were not stripping (don't include the 2nd payment). Then after it is stripped, do you modify your plan, bumping up the amount paid PLUS adjusting your withholding so that you don't end up owing taxes the next year. So your plan payment may not go up by exactly your mortgage payment amount, since you'll have a higher tax expense to budget.


Should I go ahead and adjust my withholding to that amount now before filing or on the day I file?

[smegma11]

From my experience

If you make sufficient salary you will not owe anyless money, the second will become unsecured loans and you will be expected to pay it if you have enough income. The good thing is, its interest free. My 30 years second was costing me $600 per month and only $6 was going towards principle. This way I am paying it off in full but no interest is added.

[TooMuchCredit]

Yes, my 2nd became unsecured, but since it is interest free, my taxes will go up next year as I lose about 10K in interest I could itemize. My question was I owed about $1000 each month to my loands that were stripped. When I stripped I was afraid they would apply all that $1000 to my payment AND I would owe more taxes in subsequent years due to the lose of the interest deduction. It turns out I was able to show my taxes would increase so my payment into the plan only went up $850. I'll expect the other $150 to go taxes.

[pcn]

If you make sufficient salary you will not owe anyless money, the second will become unsecured loans and you will be expected to pay it if you have enough income. The good thing is, its interest free. My 30 years second was costing me $600 per month and only $6 was going towards principle. This way I am paying it off in full but no interest is added.

If you lien strip you do not pay that debt.

[TooMuchCredit]

If you lien strip you do not pay that debt.

You still pay it. My plan payment went up because I did not have that loan expense. I was paying $1000 to the 2nd and 3rd. My plan went up by $850 when those were stripped.

That actually was beneficial to confirmation as it caused my % to unsecured to go up from about 24% to 32%. And the 2nd and 3rd are getting paid 32% of what was owed to them.

It maybe different in other districts and if your 1st+2nd is less than the IRS/Census data for your state/county that may make a difference too.

[pcn]

You still pay it. My plan payment went up because I did not have that loan expense. I was paying $1000 to the 2nd and 3rd. My plan went up by $850 when those were stripped.

That actually was beneficial to confirmation as it caused my % to unsecured to go up from about 24% to 32%. And the 2nd and 3rd are getting paid 32% of what was owed to them.

It maybe different in other districts and if your 1st+2nd is less than the IRS/Census data for your state/county that may make a difference too.

But you don't "pay it off in full", though. When you strip the lien, the lien is no longer a secured debt,and it then falls in with your group of unsecured creditors. The amount you previously paid to the 2nd can then no longer be counted as secure debt, and can affect your disposable income calculation. The amount you actually end up paying to the 2nd is determined by how your disposable income is distributed across all unsecured debts (as you pointed out in your situation it is 32%, but one doesn't actually pay it off in full in most cases, unless it is a 100% case.)