Difficult question to find an answer too

[patieboy38]

Hello -
Would love to know the following:
Can one refinance a home to pay off a chapter 13 case that includes a second mortgage lien strip. Case is 16 months into a 5 year, and the arrearage paid down on the first , along with monthly payments, put a lot of equity back in the house.

more importantly, if yes, is it a MUST that the entire base plan needs to be paid off or can a percentage of the unsec debt be paid (with a sec debt paid of course)

Lastly, any chance the second mortgage will revive themselves and object (claiming any equity should go to them)? The second mortgagor, is well aware of the lien strip, and has not even filed a POC - and too boot reported my mortgage charged off on the credit report. (working on fixing)

[RunningMan]

My understanding is that you would have to pay off 100% of the unsecured debt in addition to the secured debt to buy out of the plan early. That would include the stripped second. It does not seem likely you would have enough equity to do that since the second would have had to been completely under water to strip it.

[patieboy38]

Thanks for the quick reply. I actually have the equity for a 100% pay out but, I'd rather not pay all the unsecured debt. Trustee's like these buy outs as they get paid faster but I am wondering if you can negotiate a percentage of unsecured debt to pay on a buyout.
As far as the equity, it's a long story but I will explain a bit. The first mortgage tacked on so much of interest for the life of the loan, fees , etc that only gets applied if a pay off case was too occur. this amount was enough to take the CLAIM, not the balance, up against the homes CMA (Which was 10-15% below current values)

[BKParalegal]

A lien strip is only valid at the completion of your bankruptcy, attempting to pay off the BK with "equity" created from the lien strip would not fly at all.

Good luck

[minan]

You cannot negotiate how much gets paid back to unsecured. BK is not a negotiation. Everything is based on DMI. You will have to pay back 100% to get out of the plan early. That is my understanding.

[despritfreya]

Three things:

1. Are you above or below median? If below, you would not want to attempt this until month 37. If your commitment period is 36 months but you chose to go to 60 months you can complete your Plan (the base amount) once you are past the 36th month. Anything earlier means payment of 100% of all allowed claims. If your commitment period is 60 months (above median income filer) then to get out early you would have to pay 100% of all allowed claims.

2. You indicate that the 2nd has been stripped. What does the Judgment/Order stripping state? It should state that the voiding of the lien becomes effective as of the entry of the Chapter 13 Discharge and not be subject to any timing issues other than that.

3. You indicate that the 2nd has not filed a Proof of Claim (secured or unsecured). As a result, upon entry of the discharge that debt will be discharged. Since the lender failed to file a Proof of Claim it is not one of the "allowed claims" and will not share in any distribution under the Plan nor will it have standing to object to the early payout.

Des.

[patieboy38]

Des -
I am in a 60 mo plan. The second was stripped by way of motion to reclassify loan from secured to unsecured - approved by the court.
UNDERSTOOD on #3. Appreciate the feedback

[patieboy38]

Makes sense BKPara - I can see how the court would frown upon it (maybe) - but is it legal?

[BKParalegal]

Frowned and not legal

[patieboy38]

what if the refi was at the same amount the appraisal came in at - would it still be illegal. If I reified at the appraised rate, I could potentially buyout all of the plan. However, refi's would only be 90% of the value, so the court would know there is still another 10% of Eq

[BKParalegal]

The funds you are talking about fall under the definition of a windfall and therefore would be applied to your unsecured creditors first, raising your base by that amount. You are beating a dead horse. Lay low make your payments, wait for discharge then do what the heck you want with your new found equity.

[patieboy38]

Thanks BK - great advice - appreciate it.

[despritfreya]

A lien strip is only valid at the completion of your bankruptcy, attempting to pay off the BK with "equity" created from the lien strip would not fly at all.

. . .

Makes sense BKPara - I can see how the court would frown upon it (maybe) - but is it legal?

I am not sure if BkP was commenting on whether or not an attempt to utilize the Court created equity is allowed. He/she might have been commenting on the practical aspects.

The reality is you will not be able to refinance the property if such a refinance does not result in the release of both liens at close of escrow. As BkP points out, since your Court Order voiding the lien does not take effect until the entry of the discharge, using the equity is like putting the cart before the horse. No lender is going to agree to refinance the 1st without a subordination from the 2nd. And your 2nd is not going to agree as its lien is valid until the entry of the Discharge.

You certainly can pay all allowed claims in less than 60 months and thus speed up the voidance of the lien, you just have to find some other source of funds.

Now, if you found someone willing to refinance the 1st without a subordination from the 2nd I believe you would be allowed to benefit from the Court created equity. I see no reason why you wouldn’t. You have a final Order of the Court setting a value of an asset. Values can change from day-to-day, however the Court Order gives finality to the rights and issues between the parties. This Order has not been appealed. I assume you have a Confirmed Plan. The Order Confirming is binding upon the Debtor and the Creditor and is not subject to being set aside unless procured by fraud. As a result, your 2nd should be subject to its unsecured treatment regardless of the “current” value of the property.

Des.

[patieboy38]

Thanks Des

. . .



I am not sure if BkP was commenting on whether or not an attempt to utilize the Court created equity is allowed. He/she might have been commenting on the practical aspects.

The reality is you will not be able to refinance the property if such a refinance does not result in the release of both liens at close of escrow. As BkP points out, since your Court Order voiding the lien does not take effect until the entry of the discharge, using the equity is like putting the cart before the horse. No lender is going to agree to refinance the 1st without a subordination from the 2nd. And your 2nd is not going to agree as its lien is valid until the entry of the Discharge.

You certainly can pay all allowed claims in less than 60 months and thus speed up the voidance of the lien, you just have to find some other source of funds.

Now, if you found someone willing to refinance the 1st without a subordination from the 2nd I believe you would be allowed to benefit from the Court created equity. I see no reason why you wouldn’t. You have a final Order of the Court setting a value of an asset. Values can change from day-to-day, however the Court Order gives finality to the rights and issues between the parties. This Order has not been appealed. I assume you have a Confirmed Plan. The Order Confirming is binding upon the Debtor and the Creditor and is not subject to being set aside unless procured by fraud. As a result, your 2nd should be subject to its unsecured treatment regardless of the “current” value of the property.

Des.