Surrending Underwater Home in Chapter 13

[tomfin2000]

I apologize in advance as I'm sure this has been asked 1,000 times, but after using the search function and spending nearly an hour reading through posts, I wasn't able to find anything that addressed my particular situation.

I met with a BK attorney this morning and I'm looking at filing Chapter 13. I want to surrender my home, but it's underwater. The attorney told me that the 1st lien servicers/lenders/investors rarely file a claim for the unsecured (underwater) portion of the debt when you surrender property. However, my disposable income per the means test would be sufficient enough to cover a good portion of the estimated shortfall.

Is my attorney correct? I just have a hard time believing any servicer/lender/investor would leave money on the table like that. Also, wouldn't the difference between the loan balance and an appraisal automatically get moved into the pool with the other unsecured debt?

Any help or advice would be greatly appreciated!

[SMinGA]

The actual amount you would end up owing the lender - after foreclosure sale - won't be known when you file. (Assuming you file before FC sale.) And so the lender has to file a claim for that after its all said and done, midway thru your 13. What your BK atty seems to be saying is that the lender doesn't always go back and file that claim.

Your disposable income will become your plan payment - a % of it goes to the trustee to administer the case (5-10%, depends on district) and if your atty allows part of his fee to be paid in the plan some goes to him. Then if you have anything like taxes, back child support, etc. - those debts take priority over general unsecured. The rest goes to the unsecured who file claims.

Some things to think about: you want to go in with an accurate income/expense plan. If you're giving up the home and will be renting, you will lose the tax deduction for mortgage interest & taxes. Investigate now to see if you need to adjust your withholding. Also discuss your 401k deduction w/ your atty. 401k deductions are allowed in a ch. 13, but your atty will know what % is accepted in your district.

[tomfin2000]

Thanks for the reply, SM. That clears some of the issue up for me. The tricky part in my case is that I have enough disposable income according to the means test to repay 100% of my credit card debt and the 2nd lien under the five year plan. So if my Chapter 13 is confirmed and I've already begun making my payments to the Trustee, will the Trustee come back and increase the amount of my monthly payment (to the extent of any remaining disposable income) if the first lein holder files a claim after the property is sold in foreclosure?

[tomfin2000]

Okay, I did more searches and it seems pretty obvious that first lienholder will most definitely file an unsecured claim and I will, in fact, be on the hook in a 100% plan.

Finding a good attorney sure isn't easy. So far I've had consultations with two real estate attorneys and a BK attorney and gotten potentially devastating advice from two of the three.

[Floridagail]

We are in same boat, We are considerating a stratgic default attorney. Let us know what you find out.

[momofthree]

If you're going to end up paying the deficiency balance anyway, why not just keep the home and continue to live there? It will probably serve to decrease your dmi as well...

[tomfin2000]

Floridagail - I'm in northeast FL, so I'll keep you posted.

momofthree - That's where this seems to be headed.

To cut a long story short, I was in the middle of buying my new home and selling my old one when the bubble burst virtually overnight. I got stuck with both houses and ended up having to rent the old one at a $600/mo loss. I also had to take out a $30,000 HELOC on the new one to consolidate my bills in order to afford all of the mortgage payments. In the three years since then, I've racked up another $20,000 in debt just to keep our heads above water. My wife and I haven't gotten a cost of living increase in two years and the bills just keep going up. I've managed to keep us current on our bills, but the dam is about to break as several are about to hit the 30 day late mark. When my tenants (who have just been awesome) called a couple of weeks ago to tell me they're not renewing the lease, it was the straw that broke the camel's back.


I'm not looking for sympathy because I know everyone here is in at least as bad a situation and probably worse. I just want OUT. I'd like nothing better than to move back into my old house and forget the last three or four years ever happened.

Unfortunately, as we all know, it doesn't work that way. If you want to get out from under an upside down house and don't qualify for Chapter 7, you're going to have to repay every dime you can afford in order to do it. It doesn't
matter if you do a short sale with promissory notes and deficiency judgements, a Chapter 13, or just keep hanging on by your fingernails hoping something breaks your way. I guess at this point, it's just a question of which option will give me the most piece of mind. At least with Chapter 13, you know it will be over in five years.