Stripping 2nd Mortgage in Chapter 7?

[UpsideDownMI]

The attorney I spoke with today claims that he has a round about way of lien stripping your 2nd mortgage through a chapter 7. Although it is not truly a lien strip I found his idea to be interesting. basically he recommends to his clients that have a second mortgage that is undersecured to simply stop paying on their second mortgage. He said after 9-12 months of not paying, he contacts the lender and negotiates a buyout of their lien for somewhere around 10% of the balance. I told him I thought that was a very risky move, but he said that there is no way that the 2nd is going to payoff the 1st and foreclose the home in this market (although they will continuously threaten to).

In my opinion this attorney is highly aggressive and I may be a little too much of a conservative to roll the dice on this, but it does make me wonder if he could actually pull this off. He even stated that after filing he plans on contacting the 1st mortgage lender to "strong arm" them into renegotiating our interest rate and balance by threatening to walk away from the home in bankruptcy.

[BKParalegal]

The old rules regarding mortgages have been thrown out the window. What you attorney is offering to do can be done without filing BK. It is basically a short sale. What the BK does is prevent the loss from the writedown of the second mortgage from being sent to you as 1099 income.

Good Luck

[UpsideDownMI]

A short sale in which you actually sell to yourself?

[pcn]

Tell me more, tell me more! The first attorney we talked to suggested this also. I didn't get very favorable comments from most people here when I asked about it, but it does make some sense. One downside pointed out was that the 2nd mortgage owner could sell it to someone willing to wait it out until things improve, then try to collect. Also, you couldn't sell until the 2nd was resolved. I hope more people will comment, because we are still in the debate phase.

[HHM]

It's a "possible" option, but I have yet to hear of anyone actually doing it.

You should ask this attorney if he has "actually" done it. What we are seeing is the 2nd mortgages being sold to junk debt buyers who can wait it out. However, if you file BK, the debt is basically dead, they can't actually collect it from you, they only have a foreclosure right and their lien right (which could really screw up any future sale of your house).

As for strong arming the first, fat chance. What he may be talking about is negotiating better terms as part of a reaffirmation which is possible. Again, you should really press the attorney if he has actually done what he is proposing...the answer should be interesting.

[PoorGrammyinBK7]

I had wondered this as well and our atty mentioned something similar, but never said anything more. Now we have been discharged - no reaffirmation, continue to pay on both. If we stopped paying the 2nd, I can't imagine they would foreclose because if sold now, they would actually lose money probably - after legal costs of foreclosure and paying off the first. Its hard to pay both and with the current economy, maybe we are just throwing money away on the 2nd.

I wonder if this type of negotiation could be done after discharge. We have a relative who might be willing to refinance the whole thing if the amount of debt were renegotiated to the current value. How would one go about this? Would the attorney have to do the negotiating?

[jeb]

This works very well in area of the country that have had the Real Estate values fall through the floor.

If there is some $200,000.00 owed on a home with a first of $120,000.00 and a 2nd of $80,000.00 and it now is worth $100,000.00, if the home goes into foreclosure and is sold the 2nd holder will get nothing.

Many times, the first holder will give the 2nd a grand to get rid of them. We usually got rid of them for $1,500.00 - 2,000.00 just to make things easier and get homeowner out of a 1099. - jb

[HHM]

This works very well in area of the country that have had the Real Estate values fall through the floor.

If there is some $200,000.00 owed on a home with a first of $120,000.00 and a 2nd of $80,000.00 and it now is worth $100,000.00, if the home goes into foreclosure and is sold the 2nd holder will get nothing.

Many times, the first holder will give the 2nd a grand to get rid of them. We usually got rid of them for $1,500.00 - 2,000.00 just to make things easier and get homeowner out of a 1099. - jb

Jeb, that last sentence about not getting a 1099 is total BS. IRS regulations REQUIRE the issuance of a 1099, you cannot contract or otherwise agree to not issue one.

This is one of those things that sounds good in theory, but in the real world, rarely works. You are trying to apply common sense to an industry that does not have "common" sense. Look at it this way, this is the same line or reasoning people typically assume about credit cards.

"If the credit cards won't get anything if I file BK, why wouldn't they settle?"
Does that sound familar here...
"If the 2nd mortgage is totally upside down, why wouldn't they settle?"

Credit cards still charge off and refuse to settle. Second mortgages are still fighting.

[relief13035]

Oh I hope that somebody that actually made this work chimes in soon.

[pcn]

We usually got rid of them for $1,500.00 - 2,000.00 just to make things easier and get homeowner out of a 1099. - jb

Jeb, what line of work are you in? More details please about what you did and how it worked.

[UpsideDownMI]

Thanks for all the replies. I think that the reason this is not common is that you are basically gambling with the future of you home. When most people file, they either want to keep their home or walk away from. With this option you would be somewhere in between. For people like me, who want to keep their home, they would have to be willing to live with the consequences if this does not go as planned. That's what I am stuck on.

I am pretty confident that the 2nd would not take any action until the real estate market bounces back to the point where the wouldn't lose any more money by foreclosing. In my case if the 2nd foreclosed they would lose 30k more than they would stand to lose if I just stopped paying them. Of course this could easily change in their favor, 3-5 years down the road when the principle on the first is reduced and housing prices start to rise.

What I am really curious about is if one did attempt this and say after 2 years the 2nd started the foreclosure process, could it be stopped by paying the past due payments or would they have to pay off the balance?

If anyone has done this please post.

[Overmylimit]

I'm confused (not like thats a new development) the OP I think wanted to keep their house, so why was there mention of short sale?

I actually talked to someone who did this and it worked. Their 1st was so big that the Jr loan would never think of buying out the 1st position. However the 2nd put a lean on the property and if the value ever goes back up they will press to foreclose.

I live in Ca in the city that has the highest foreclosure rate in the entire land. I am tempted to try this as well, as many here know my 1st is 600k my 2nd is 177k the value right now is about 350-400k. I have talked to my 2nd loan company and basically told them if I walk they will lose every dime, still they don't want to negotiate...so at some point one way or another these guys aren't going to get a dime.

Oh and by the way if your scratching your head wondering why I don't just walk from the property, my kids grew up here and we remodeled to no end. I used equity for business loan thats why the balance is so high.

[justbroke]

I personally have heard of this, but it's all speculative. I haven't seen it actually work either. Again, it's an interesting strategy, but it's only that.

[UpsideDownMI]

I think you are referring to the statement made by BKParalegal. I believe what was meant by that statement is the characteristics of this type of deal are similar to that of a short sale. In other words, although, you are not actually selling the property, paying off the 2nd at a reduced amount is similar in theory to them signing off on selling your home via short sale.

As an example, say I have an offer to sell my home that would net the 2nd lender 6k and the 2nd lender approves of the sale. The 2nd would then in turn would release their lien on the property at the closing of the sale. Now say that I have not paid my 2nd in 12 months and they know it would cost them too much to foreclose. I offer the 2nd lender 6k to forgive the remaining balance of my 2nd. If they agree, they would release the lien on the property. In the eyes of the 2nd lender these two examples provide them with the same result, they both give them 6k and require the 2nd lender to forgive the remaining balance and remove their lien. So this concept is similar to a short sale to the 2nd lender although their is not a sale.

You are right in your situation the 2nd definately would not get a dime. Are you current with your second? From what I understand you have to be behind for them to negotiate. I would liken this to credit card companines offering settlements, where at first they want the entire balance, but with each month that you do not pay the continue to reduce their offer.

I don't blame you at all for not walking away, we are all emotionally tied to our homes. If I treated my home like a business I would walk away, just like the auto companies here close plants when the are no longer making money. However, my home is the only home my children have known. There are alot of memories here. Good luck to you.

[Tom_Mi]

I read that the Obama plan-thingy will pay a loan servicer 1500 to rework the loan and another 150 if they can negotiate away a 2nd.

But I also read that banks might wait for pending legislation which prevents lawsuits from investors angry about the reworks and writedowns.

My investor isn't fannie/freddie (someone in the UK/Libor world). I'm calling my bank's bk dept today for their opinion; hopefully I'll get someone who has a clue.

I'd gladly pay 10% and take a 1099 to get rid of my 39k 2nd. ( I took the 2nd to buy other real estate that tanked..no more real estate and so the 2nd is tough to pay.)