2nd Lien buy out after Chapter 13

[vicmost]

I'm on the eve of filing Chptr 13 and I am planning to lien strip my second mortgage. I was doing some research on here about 2nd lien buy-outs and had a thought.
I owe 302k on my first. I owe 166k on my 2nd. Home value is currently 290k.
In my chptr 13 I have a zero asset case and will only be paying the trustee on priority debts and some secured debts of 13k. I will actually have negative dmi.
A few months go buy and I contact my 2nd (which I haven't paid since 12/09) and offer them 5k to 10k that my investor brother would provide.
They decline...I continue in my chptr 13..No loss...No risk..

They accept..(because they are receiving nothing)..

My Investor pays up...
I now convert to a chapter 7...I pay my new 2nd lien holder (my brother) over time..He gets his money back and releases the original lien of 166k when he gets his 5k back. At this point he has to submit a 1099 on my for the cram down..(i think)

Won't my filing bk protect me from having to pay the IRS the taxes on 161k?

It's just a thought and I know it's been covered before but the rules of this game change rapidly!

[newbie2]

I'm on the eve of filing Chptr 13 and I am planning to lien strip my second mortgage. I was doing some research on here about 2nd lien buy-outs and had a thought.
I owe 302k on my first. I owe 166k on my 2nd. Home value is currently 290k.
In my chptr 13 I have a zero asset case and will only be paying the trustee on priority debts and some secured debts of 13k. I will actually have negative dmi.
A few months go buy and I contact my 2nd (which I haven't paid since 12/09) and offer them 5k to 10k that my investor brother would provide.
They decline...I continue in my chptr 13..No loss...No risk..

They accept..(because they are receiving nothing)..

My Investor pays up...
I now convert to a chapter 7...I pay my new 2nd lien holder (my brother) over time..He gets his money back and releases the original lien of 166k when he gets his 5k back. At this point he has to submit a 1099 on my for the cram down..(i think)

Won't my filing bk protect me from having to pay the IRS the taxes on 161k?

It's just a thought and I know it's been covered before but the rules of this game change rapidly!

The 2nd buyout that you are talking about isn't occurring after a chapter 13 discharge, but within the chapter 13 plan. I don't think that would be acceptable because the 2nd is treated as unsecured in your plan, and therefore should only get as much as the other unsecured creditors during the plan. I could be wrong, perhaps others have done this and I'm not aware of it. It seems to me though that it treats the other unsecured creditors unfairly and that could be the flaw in your plan.

[HHM]

I agree, it doesn't really work that way. A lien strip, etc, doesn't take affect until the case is DISCHARGED. Also, the deficiency only gets eliminated (hence the tax liability) once the debt is DISCHARGED. AND, you would need to get permission from the BK trustee and court (to lift the automatic stay) to do this, an I can't think of a reason why they would agree to allow it. The court will likely view it as treating one creditor more favorably then the others (since the 2nd mortgage is unsecured).

Nice idea, but I don't think it will work in a 13. To many legal technicalities in a 13 that get in the way.

Just an FYI, 2nd mortgage lenders are starting to fight the lien strips more often, and many courts are now requiring adequate protection payments be made to the second mortgage. Although, the AP payments are not very high (I believe it is 1% of the loan balance over life of plan).

[vicmost]

The 2nd buyout that you are talking about isn't occurring after a chapter 13 discharge, but within the chapter 13 plan. I don't think that would be acceptable because the 2nd is treated as unsecured in your plan, and therefore should only get as much as the other unsecured creditors during the plan. I could be wrong, perhaps others have done this and I'm not aware of it. It seems to me though that it treats the other unsecured creditors unfairly and that could be the flaw in your plan.

I meant this to occur within the Chapter 13 plan that I would convert to a chapter 7... I guess you could do this before filing bk 7 or 13 but then you would have to pay the 1099 taxes on the cram down..
..I don't see where anyone has actually done a 2nd trust deed buy out before, during or after fillng..

[vicmost]

I agree, it doesn't really work that way. A lien strip, etc, doesn't take affect until the case is DISCHARGED. Also, the deficiency only gets eliminated (hence the tax liability) once the debt is DISCHARGED. AND, you would need to get permission from the BK trustee and court (to lift the automatic stay) to do this, an I can't think of a reason why they would agree to allow it. The court will likely view it as treating one creditor more favorably then the others (since the 2nd mortgage is unsecured).

Nice idea, but I don't think it will work in a 13. To many legal technicalities in a 13 that get in the way.

Just an FYI, 2nd mortgage lenders are starting to fight the lien strips more often, and many courts are now requiring adequate protection payments be made to the second mortgage. Although, the AP payments are not very high (I believe it is 1% of the loan balance over life of plan).

Thanks,
I figured they would have some legal angle to block it...
As far as the FYI goes - I'm at the end of my rope. I'll find out next month when I file....Maybe I can offer them 1.1 %..lol

[SMinGA]

Doing it in an active ch. 13, here are the potential issues I see:

1. your 2nd lender won't be able to work out any dealings directly with you, only able to go thru your atty.

2. lien strip would occur (I believe) prior to confirmation, so there would be no lien for your investor to 'buy out'.

[HHM]

Doing it in an active ch. 13, here are the potential issues I see:

1. your 2nd lender won't be able to work out any dealings directly with you, only able to go thru your atty.

2. lien strip would occur (I believe) prior to confirmation, so there would be no lien for your investor to 'buy out'.

To clarify, although the motion etc, to strip the lien usually occurs before confirmation, it doesn't become "effective" (i.e. the lien is not voided) until the case discharges.

[catleg]

The IRS won't tax you as long as this happens by 2012, though you might have state tax liability.

http://www.irs.gov/individuals/article/0,,id=179414,00.html

If you can get a 36 month chapter 13, that's probably your best out.

I don't think they'd settle for 5 or 10k. Not without a gun to their head. Like the first foreclosing.

[mybk]

To clarify, although the motion etc, to strip the lien usually occurs before confirmation, it doesn't become "effective" (i.e. the lien is not voided) until the case discharges.

Having just went through this, this is what was explained to us:

The action is actually a lien avoidance, not a strip. The lien is in full force until one of two things takes place. You receive a discharge, for which then you no longer need consent from the lender (you simply go down to the title company, give them the court order and discharge evidence and they will remove the second lien holder). You may have to pay them though for this service (few hundred dollars in our case). If you fail to remember, the issue will come up again if you sell or refinance the home. At which time you would present both documents and the lien would be 'avoided'.

The lender does not have to revisit this issue, so removing the lien is typically not done. Our attorney did indicate to us that if we wished a follow up notice from them to the lender they may be able to get the lender to comply with the order.

Sometimes it can be confusing the term 'lien strip'. I had thought it would be removed after our discharge, but then learned it is simply avoided. The title company had a good way of putting it....imagine all the paperwork on the table at time of signing, the second lien would come up, title clerk asks you about it, you present the documents, they put the lien to the side or 'already addressed' pile and continue with the paper work. Hence the term 'avoidance'.

[mybk]

Just to clarify, because reading the thread I found the responses to the tax issue confusing.

The tax would not be something applied to the discharged second mortgage. It would only come into play if you settle with them. As stated above, you attempt to settle and they would be required to give the money back anyhow (in a chapter 13) because it would be showing preference of one creditor over others (or you would be required to pay all the other creditors the equal amount).

The only way it could likely happen, is you would have to petition the court to secure the lien again (which would be the worse thing you could do) and then file a chapter 7 first on all creditors (you can still not settle first with the second because once again, it would be a preference). After ample time you can go and settle with the second, but you of course are starting at ground zero with them and now they know you can not strip them. They could easily stall long enough that could make tax implications for you in 2012, or sell the debt off to a collection company far less willing to work with you.

Would advise that you talk with your attorney and consider seeing the plan to the end. It is not that bad and certainly gives you some lessons on where your money goes and a fresh start after it is over. Not to mention your home is less upside down (since the second will be gone), and closer to paid off than you thought you would be when you purchased the home.

[vicmost]

The IRS won't tax you as long as this happens by 2012, though you might have state tax liability.

http://www.irs.gov/individuals/article/0,,id=179414,00.html

If you can get a 36 month chapter 13, that's probably your best out.

I don't think they'd settle for 5 or 10k. Not without a gun to their head. Like the first foreclosing.

Very interesting, I didn't know this existed. If I am not mistaken this means that I could try to negotiate this before actually filing without fear of having to pay the taxes on the forgiven debt.
The catch would be that I would have to file bk on my brother of which I'm sure the court would find that I favored him over other creditors...

As far as the 36 month plan I might be able to qualify but I have a feeling that it is extremely rare in my district and they will strong arm me into a 60 month plan or say that I don't make enough $$ to submit a reasonable budget to the court and should file chapter 7...
I will try though!
It was just a last ditch idea..I'm pretty sure I will end up with a 60 month plan and a lien strip or "lien avoidance" as MYBK pointed out.
Many Thanks to all!

Thanks!

[ColoradoBell]

Insofar as the 2nd mortgage being 'avoided' only after discharge, is that the same with avoidance of judgment liens (that impair homestead exemption) too?

If so, does it not matter that in the 5 or so years between filing and discharge, that the equity in the home might go up considerably (so that the lien holder might argue that now the 2nd or the judgement lien is secured)?

[HHM]

Insofar as the 2nd mortgage being 'avoided' only after discharge, is that the same with avoidance of judgment liens (that impair homestead exemption) too?

If so, does it not matter that in the 5 or so years between filing and discharge, that the equity in the home might go up considerably (so that the lien holder might argue that now the 2nd or the judgement lien is secured)?

Nope, that is not an issue. For purposes of BK (and lien strips) the value at issue is the value at the date of filing.

Not sure on the judgment lien issue in particular, with 2nd mortgages you have an interplay between section 506 and 1323 of the BK code. Not sure how that would work in the judgement lien scenario.