Pre-Filing Question: Chapter 7 with Second (Loan)

[MGBK]

Hi Everyone,

I've been lurking here since roughly February when the inevitable became obvious to me, but I haven't posted until now (so please, be kind ). I just met with a fourth BK atty since March and am about ready to pull the trigger, but had some questions about my specific situation and best options. Here's my story:


Location:

• California (Los Angeles area)

House:

• Currently Valued @ $480,000 to $520,000
• 1st: $540,000 (Option/Arm w/ Countrywide)
• 2nd: $100,000 (Fixed Loan @ 7.5% w/ Citimortgage)
• 1st: Missed 2 Payments (working w/ Countrywide on loan mods)
• 2nd: Last payment was 4/2/08 (No contact with Citi, but they offered a rate reductioin to 4.5%)
• Property Taxes: Unpaid for 2007 and 2008 ($17,000 roughly); County can force a tax sale in 5 years after first default (either 2012 or 2013 -- not sure).
• Homeowners Association: Unpaid since 5/08 ($115/mo. Plus Accruing Fees)

Credit Cards:

• Total Debt: $150,000
• Last Payments: 5/08
• Creditors: BofA, Citi, Discover, WAMU, AMEX
• Lots of calls and letters, some threatening charge off now

Additional Unsecured:

• $10,000

Student Loans:

• Total Debt: $150,000
• Incurred 2002+ in MBA and some doctoral work
• All loans in Deferrment through 8/09

Cars:

• 2008 Scion xB @ $440/month (Purchased New: 5/08)
• 2004 Camry XLE $330/month (Purchased Used: 4/08)
• Put no cash down on both cars
• Both loans w/ Toyota Financial
• Roughly 1 payment behind

Household:

• 2 Adults
• 2 Children

Employment:

• Me: Adjunct Teacher (Not Full Time)
• Wife: Chief Domestic Officer (@ home with kids)

Income:

• Annual: $65,000 (Gross)
• Annual: $55,000 (Net)
• Monthly: $4,600 (Net)
• Annual Income Based on Prior 6 Months: $63,000 to $68,000 (Range due to my employment)
• Living hand-to-mouth; no savings at all
• Pass the means test

Expenses:

• Living: $3,500 to $4,500 (Monthly Range)
• 1st Mortgage: $2,020 (Minimum Pymt w/ Neg Am)
• 2nd Mortgage: $805 (Unpaid since 4/08)
• Break-even or short each month (no disposable monthly income)

Reasons for BK:

• Short Version: Catastrophic medical expenses (out of pocket)
• Longer Version: Second son born 1/06 with various life threatening issues; almost died three times; have health insurance, but they didn't cover LVN, home-care and other therapies which we needed for son's survival; we paid $100,000 to $125,000 out of pocket from 2006 to now; second son diagnosed with autism 8/06; both sons require extensive treatment and therapy which prevent my wife from working.

Options:

• Lawyer A: 13 to strip the second, but with our low income it is a de facto 7 so we get the best of both (theoretically). Estimate: $3,000 to $5,000
• Lawyer B: 7 (doesn't do 13s) and let 2nd mortgage go to a lien as the house is so far underwater the lender really has no immediate recourse (though they can put a lien on the property). He also suggested approaching the 2nd holder after BK for a new 1st that wraps both the current 1st and 2nd as they might have incentive to do so -- or to approach them in a couple years with a cash payoff offer (if I have the case and want to remove the lien). He also projected that if I stopped paying 1st mortgage, but filed BK before the notice of default was filed that I could wind up living rent free for 8 to 12 months. He also said I might be able to get my car payments lowered after the BK. Estimate: $5,300

Questions:

• I would much rather do the 7 and like the "theory" of Lawyer B, but am a little uncomfortable having the 2nd basically unresolved with the lien on the house. I would rather not do the 13, but like the idea of getting rid of everything -- but I honestly don't think I can afford a payment plan (maybe a few hundred a month if the loan mods on my 1st are good). Which option sounds more sensible?
• Can the 2nd mortgage holder sue me personally after a 7 or does the 7 remove my personal liability for the loan?
• Can my house be sold with a lien or would I need to address the 2nd directly at some point before selling the house (does the lien just suck any profit out of a future sale up to the value of the lien -- what happens if there is not enough equity when we sell it to cover the $100K)?
• What happens if we go with the 7 and in a year or two still can't afford the house -- can we just walk away/foreclose? At that point with the BK on our record would a foreclosure really be a huge hit on our credit report?
• Can we file a 13 first to strip the second and then convert it to a 7 -- would that make more sense?
• Lawyer B indicated that the unpaid HOA dues could not get wiped out in a BK, 7 or 13, and that they had a right to also place a lien -- is this true?
• If I never again paid HOA dues but stayed in the house after the BK could they come after me personally or are they limited to a lien?

Thanks for your help -- this board has been a source of great help for me over the past few months as I tried to understand how this all works in general and I look forward to your comments and ideas about my specific situation.

- MGBK

[justbroke]

Answers... well... opinions...

I would much rather do the 7 and like the "theory" of Lawyer B, but am a little uncomfortable having the 2nd basically unresolved with the lien on the house. I would rather not do the 13, but like the idea of getting rid of everything -- but I honestly don't think I can afford a payment plan (maybe a few hundred a month if the loan mods on my 1st are good). Which option sounds more sensible?

It's tough. It's always best to do the 7 if you can (and can protect certain assets). To do the 7, however, you'll need to get current on the first. Hopefully, you can work out a loan modification BEFORE filing. Letting the 2nd mortgage "ride-through" the Chapter 7 and hoping they don't attempt foreclosure on it... is a chance you'll have to deal with. You could always file a Chapter 13 after if the 2nd proceeds with foreclosure. Then just strip it off and pay it as unsecured over 3 to 5 years. That's a Chapter 20.

Can the 2nd mortgage holder sue me personally after a 7 or does the 7 remove my personal liability for the loan?

Can sue you through foreclosure.by enforcing their lien. Will it happen, don't know. I'm assuming that you seek to discharge the 2nd in the Chapter 7.

Can my house be sold with a lien or would I need to address the 2nd directly at some point before selling the house (does the lien just suck any profit out of a future sale up to the value of the lien -- what happens if there is not enough equity when we sell it to cover the $100K)?

If the 2nd lienholder doesn't do anything, then you'll have to satisfy the lien when you sell the house in the future. The 2nd lien will prevent you from selling it for anything less than lien 1 + lien 2.

What happens if we go with the 7 and in a year or two still can't afford the house -- can we just walk away/foreclose? At that point with the BK on our record would a foreclosure really be a huge hit on our credit report?

A foreclosure is actually worse, but at that pointy, who's counting points? A foreclosure post-Chapter 7 discharge, could hit you hard in regards to credit score.

Can we file a 13 first to strip the second and then convert it to a 7 -- would that make more sense?

No. You would have to file a Chapter 7, then a Chapter 13 to strip. If you strip a lien in a chapter 13, and then convert to a Chapter 7, the lien is re-instated by operation of law!

Lawyer B indicated that the unpaid HOA dues could not get wiped out in a BK, 7 or 13, and that they had a right to also place a lien -- is this true?

Yes. HOA fees are statutory liens and are priority, just like property taxes. However, they attach to the home.

If I never again paid HOA dues but stayed in the house after the BK could they come after me personally or are they limited to a lien?

They can foreclose... but it is unlikely. You should have a Rider attached with your Mortgage/Note which is the HOA Rider. It should contain their remedies. Again, it's usually a lien and it's enforced when you sell it, or if they decide to foreclose.

Even if the HOA decided to foreclose, usually the first lienholder (or 2nd in over secured loans), will bid on it at the foreclosure sale, but that's not always the case. HOAs have some serious powers, and a review of your HOA Rider is in order to see what exposure you have!

Well, that's it for me. Just my opinion.

[MGBK]

Thanks for your helpful answers, justbroke. A few things to clarify:

It's tough. It's always best to do the 7 if you can (and can protect certain assets). To do the 7, however, you'll need to get current on the first. Hopefully, you can work out a loan modification BEFORE filing. Letting the 2nd mortgage "ride-through" the Chapter 7 and hoping they don't attempt foreclosure on it... is a chance you'll have to deal with. You could always file a Chapter 13 after if the 2nd proceeds with foreclosure. Then just strip it off and pay it as unsecured over 3 to 5 years. That's a Chapter 20.

Do we have to wait four years from the date we file the 7 to file the 13? If we go with the 7 would there be any benefit to contacting the lender after we file, but at some point before we anticipate selling it (if we do) to renegotiate the terms? Lawyer B suggested that after the BK if we keep the house, we approach lien 2 holder to see if they will write one new mortgage for both loans at some wildly reduced rate (making them 1st and only holder, thereby giving them some incentive to cut a good deal).

Can sue you through foreclosure.by enforcing their lien. Will it happen, don't know. I'm assuming that you seek to discharge the 2nd in the Chapter 7.

We are evaluating whether or not to keep the house. Right now the desire to stay is more practical than emotional: if we can get the first moded to a decent amount we would likely be at or lower than rent for a comparable (or at least feasible) place. Plus there are moving expenses, etc. Also, one issue is that with our son with autism it might be hard on him to totally change his situation, but then again I am sure he can adapt.

If the 2nd lienholder doesn't do anything, then you'll have to satisfy the lien when you sell the house in the future. The 2nd lien will prevent you from selling it for anything less than lien 1 + lien 2.

So if we decide to (or need to) sell before the value of the home covers lien 1 + lien 2, we would be unable to do so unless we directly negotiated at that point with lien 2 holder to cover the difference? In other words, with a lien they get their cash either way? They wouldn't just be forced to basically get what they can (in other words take as much of the equity as is available and be done?). At this point I am fine living here as if we are renting, but don't want to owe money out of pocket if and when we have to leave.

A foreclosure is actually worse, but at that pointy, who's counting points? A foreclosure post-Chapter 7 discharge, could hit you hard in regards to credit score.

A foreclosure is worse than a BK on a credit report? How long does that stay on your record? Also, if we foreclosed on the house after the 7, would lien 2 holder be able to come after us personally or do they have to eat it?

No. You would have to file a Chapter 7, then a Chapter 13 to strip. If you strip a lien in a chapter 13, and then convert to a Chapter 7, the lien is re-instated by operation of law!

Sneaky bastards! Is this part of the 2005 change or has it always been there?

Yes. HOA fees are statutory liens and are priority, just like property taxes. However, they attach to the home.

So if we sell the house willingly, the same story as with the second mortgage? The lien has to be paid from the proceeds of the sale or from me personally? Or by saying they attach to the home, does that mean they are SOL?

They can foreclose... but it is unlikely. You should have a Rider attached with your Mortgage/Note which is the HOA Rider. It should contain their remedies. Again, it's usually a lien and it's enforced when you sell it, or if they decide to foreclose.

Even if the HOA decided to foreclose, usually the first lienholder (or 2nd in over secured loans), will bid on it at the foreclosure sale, but that's not always the case. HOAs have some serious powers, and a review of your HOA Rider is in order to see what exposure you have!

I will check into this -- it is in the original loan docs? Also, is there any benefit to making some personal appeal to the HOA, especially if we do stay? If we do stay, would we just start paying from the point of the BK forward and deal with the arrears separately, or might they apply the new payments to the older debt?

Well, that's it for me. Just my opinion.

For someone who is "just broke" you were "just helpful!"


One other procedural/timing question:

• The Background: My in-laws just filed BK as well (it's a family tradition now, apparently ). Their 1st is with WAMU and their lawyer (who might also be ours), is negotiating for new loan terms. He has mentioned something called a 1-2-3-4-5 loan in which for each of the next five years you pay 1%-2%-3-%4%-5 of the principal w/o neg am (then it resets to some normal rate). We are hoping for something similar. But even if they don't get something that good but can still stay in their house, we might just completely bail on ours and move in with them. Alternately they might move in with us. (We will spend the money we save on group therapy to help us survive cohabitation!)
  
• The Question: How long after we file do we have to decide whether or not to reaffirm the 1st mortgage (keep the house)? My in-laws filed on 11/24 and their 341 is on 12/29 -- so will they know from WAMU by then or is it on a different timeline? Basically, I can't wait much longer to file, but I assume before my 341 I will need to know if I am keeping my house or not. My hope is that my in-laws will know their situation before I have to make this decision --- because the outcome of their loan mod directly affects my decision to keep my house or not. BTW I am *thinking* of filing between 1/1/09 and 1/15/09.

[justbroke]

I need some time to think about my answers, as I'm leaving the house now. (Saturday night!)

I wanted to mention that the Chapter 13 may not protect you on the second (enough). The problem is that a Chapter 13 not filed 4 or more years after a Chapter 7, will not discharge any debt. That means that you'd have to pay the 2nd mortgage during the Chapter 13.... in full. (This was one of the changes in the 2005 BAPCPA.) A Chapter 20 (A Chapter 13 immediately after a Chapter 7), is usually good when you have arrearages or priority taxes to pay. Otherwise, you lose the discharge if it's done within 4 years after the Chapter 7.

[ThreadsSnapping]

If I remember correctly, you can file a Ch 13 immediatly after a Ch 7 but you would have to make the payments for at least 4 years before you can be granted a discharge.

TS

[HHM]

If I remember correctly, you can file a Ch 13 immediatly after a Ch 7 but you would have to make the payments for at least 4 years before you can be granted a discharge.

TS

Acutally, I don't think it works that way, the dates run from the date of the prior discharge to the date of "filing" the subsequent 13. If you FILE a 13 within 4 years of a prior chap 7 discahrge, that subsequent chap 13 cannot be discharged.

However, that rule does not apply to conversions.
For example
2002 prior chap 7 discharge (not eligible for chap 7 discharge until 2010).
2006 file chapter 13 (granted this 13 would be dischargeable)
2010 convert the 13 to a 7, you would be able to get a chap 7 discharge.

[HHM]

To the OP

1st. Forget about your credit report in your analysis, it is pointless to worry about it.

As for your questions
HOA: Any HOA fees that come due AFTER the date you file your case you are personally responsible for and they can subsequently put a lien on your home.

Post BK modification of mortgage, If you file BK, unless you reaffirm the 2nd, do not expect them to entertain any type modification; legally, you have discharged your personally responsibility for the mortgage in a 7, there actually is nothing to modify. The lien is what it is. The discharge actually prevents a post BK modification of the 2nd mortgage. (same is true for the first).

As for deciding to the keep the house, if you are more than 15% negative equity, the answer is a no brainer, dump the house (or strip the 2nd if you can). If you need to pin your hopes on the 1st mortgage doing a mod, dump the house.

Voluntary sale (or short sale): Correct, if you try to sell, the 2nd mortgage would have to agree to release their lein, which means they need to be paid, or agree to accept less (i.e. short sale, do a search for posts related to short sales).

[justbroke]

Thank you for stepping in HHM (in my absence). Very succinct and to the point as always. I'll just say... what HHM says.

[MGBK]

To the OP

1st. Forget about your credit report in your analysis, it is pointless to worry about it.

As for your questions
HOA: Any HOA fees that come due AFTER the date you file your case you are personally responsible for and then can subsequently put a lien on your home.

Post BK modification of mortgage, If you file BK, unless you reaffirm the 2nd, do not expect them to entertain any type modification; legally, you have discharged your personally responsibility for the mortgage in a 7, there actually is nothing to modify. The lien is what it is. The discharge actually prevents a post BK modification of the 2nd mortgage. (same is true for the first).

As for deciding to the keep the house, if you are more than 15% negative equity, the answer is a no brainer, dump the house (or strip the 2nd if you can). If you need to pin your hopes on the 1st mortgage doing a mod, dump the house.

Voluntary sale (or short sale): Correct, if you try to sell, the 2nd mortgage would have to agree to release their lein, which means they need to be paid, or agree to accept less (i.e. short sale, do a search for posts related to short sales).

Thanks for you input, HHM. Now that you have replied to a thread I started I feel "official" here!

As for the credit score I am not worried about a potential "double ding," I would just hate to be 4 years into the 10 from the BK and then set myself back again with a foreclosure or short-sale. But hey, you do what you gotta do.

Regarding loan mods: I only intend to (possibly) reaffirm the first -- still not sure. I cannot justify reaffirming another $100K of debt on the house when there is no value there to support it. As for the first, we would have to settle the mod BEFORE filing or discharge for it to take effect? I am assumining it is by the discharge as my in-laws have filed and are now negotiating with their mortgage co (actually the lawyer explained that the mortgage co. would not even entertain the possibility of a mod before the BK).

Right now without the second, we are theoretically within the 15% range. The current first is $540,000 and a neighbor with a very similar house has hers listed for $499,000 -- but it has been on the market for at least 3 months and is not moving. My guess is that right now the "magic" price is $450,000 to $470,000 (especially since everyone expects a fire sale). So it is close.

And, yes, without the loan mod staying here wouldn't make sense because we are paying (well, supposed to be paying) $2020 a month, but that is WITH neg am. If they can get the payment below $1500 WITHOUT neg am that would make a big difference for us. However, the remaining issues are accumulating property taxes and HOA fees.

Financially speaking I would rather bail on this house -- if I am going to nuke my credit I want the full benefit of the experience. The only reason staying here makes sense is if the payment on the 1st is substantially lower than rent would be elsewhere. Though, again, the property tax and HOA issue comes up. Plus, we could potentially find a place with some utilities included.

Moving in with my in-laws, though uncomfortable on many levels, would be ideal for us, but I don't really know how feasible it is for them. Plan B is if they get out of their house and rent closer to us they would be able to help financially a little so we could keep the house.

However, they are pushing my wife to keep the house, even if it is not in our best interest. And, not surprisingly, they pushed us to sell our previous house, which even with the current situation, we would would have still almost doubled our money. (There is still some resentment there, though it is waning).

Regarding the lien(s), so basically if Citi and the HOA (presumably) don't play ball, we are stuck with having to short-sale it, correct? Would a deed-in-lieu be an option, or is that only for a first?

But, as you said, in the 7 we are not personally liable, correct? So worst case if we short sale it or foreclose, we will have perhaps lived here another 4 years (when the property taxes catch up with us) at a reasonable rent (if Countrywide makes us a good deal)?

Again, I am trying to think creatively despite the craziness of this all (e.g. accepting that even with a loan mod we would basically be "renting" here for 4 more years -- unless the market magically recovers).

[MGBK]

To the OP

1st. Forget about your credit report in your analysis, it is pointless to worry about it.

As for your questions
HOA: Any HOA fees that come due AFTER the date you file your case you are personally responsible for and they can subsequently put a lien on your home.

Post BK modification of mortgage, If you file BK, unless you reaffirm the 2nd, do not expect them to entertain any type modification; legally, you have discharged your personally responsibility for the mortgage in a 7, there actually is nothing to modify. The lien is what it is. The discharge actually prevents a post BK modification of the 2nd mortgage. (same is true for the first).

As for deciding to the keep the house, if you are more than 15% negative equity, the answer is a no brainer, dump the house (or strip the 2nd if you can). If you need to pin your hopes on the 1st mortgage doing a mod, dump the house.

Voluntary sale (or short sale): Correct, if you try to sell, the 2nd mortgage would have to agree to release their lein, which means they need to be paid, or agree to accept less (i.e. short sale, do a search for posts related to short sales).

So if we want to try and keep the house -- really not what I want to do, but who knows -- we should try to settle the MOD right befor we file? At least that way if we can work it out it is under the new terms?

[HHM]

So if we want to try and keep the house -- really not what I want to do, but who knows -- we should try to settle the MOD right befor we file? At least that way if we can work it out it is under the new terms?

Correct.