So could I "Redeem" my home's 2nd at a big discount?

[Tom_Mi]

I asked this in another thread, and it may have been overlooked. So I'm starting this thread and will post what my Attorney tells me.

Basically, I'm not discharged yet, but will be in about 30days. 341 was Feb4. I really want to keep my house but my 2nd loan (40k) was supposed to be paid off by other real estate that tanked on me.

So I decided what the heck and called the bank's Bankruptcy dept. Here's how it went:

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Me: "look, we're not reaffirming because of...blah blah....but I've exempted enough cash to pay you 12% for redemption of the loan. A junk debt agency will likely pay you 10% or less for a Bankrupted note. You can give me a 1099 for the rest".

Bank: "We can't do that right now, you're in bankruptcy and you'll have to file a 'motion to redeem' and let the courts sort it out".

Me: Ok, has your department seen these 'motions to redeem'? And how do they turn out?

Bank: "No. That's all handled in the court."

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???????....I'll let you know what my atty tells me. He's probably tired of my questions, but eventually he'll call me back with an answer.

[HHM]

The main problem, you CANNOT cram down a 2nd mortgage, so the bank actually has to agree to the lesser amount. Thus, redemption is the wrong legal mechanism for doing this because section 722 (redemption) applies only to PERSONAL PROPERTY, not real estate.

The only thing you can do is offer them a reaffirmation agreement with new terms.

[pcn]

Seems logical, but then one thing I've quickly learned is that logic and common sense are in short supply in the credit world. Hope you get some good experienced replies, we're in the same boat.

[Tom_Mi]

The main problem, you CANNOT cram down a 2nd mortgage, so the bank actually has to agree to the lesser amount. Thus, redemption is the wrong legal mechanism for doing this because section 722 (redemption) applies only to PERSONAL PROPERTY, not real estate.

The only thing you can do is offer them a reaffirmation agreement with new terms.

Ok, but then I guess I'm confused why the guy at 5/3 Bank told me to enter the motion to redeem. If it's not possible to redeem real estate, why would he have offered it up as an option?

[HHM]

Because he doesn't know what he is talking about.

[pcn]

The main problem, you CANNOT cram down a 2nd mortgage, so the bank actually has to agree to the lesser amount. Thus, redemption is the wrong legal mechanism for doing this because section 722 (redemption) applies only to PERSONAL PROPERTY, not real estate.

The only thing you can do is offer them a reaffirmation agreement with new terms.

At what point do you do that?

[HHM]

At what point do you do that?

Sometime after your BK is filed, but before discharage.

[pcn]

Trying hard not to apply logic to credit - how likely or often are these reaffirmations with better terms on underwater 2nd mortgages accepted? I'm guessing the area, lender, etc all play a part in the probability. If it is not accepted, then the homeowner could chose to not reaffirm themselves, correct? Is there something that prevents renegotiating after the discharge?

[fltoo]

Yes, you can redeem real estate, just means you are getting everything paid up to date before bank takes the house.

Lots of incorrect terms being thrown around here.

Pcn, IMO, the solution, although not black and white, is logical and makes sense. Way too much extraneous information sometimes and digressions occur.

[HHM]

Yes, you can redeem real estate, just means you are getting everything paid up to date before bank takes the house.

Lots of incorrect terms being thrown around here.

Pcn, IMO, the solution, although not black and white, is logical and makes sense. Way too much extraneous information sometimes and digressions occur.

Ok, we need to back up...and clarify the terms reaffirm and redeem. These are terms of art or technical terms in the BK context. The "issue" here is how do you deal with the "lien" of second mortgage on real estate that is your primary residence under chapter 7.

The general rule is, liens survive BK, in full.

There are only 3 ways to deal with a lien in BK that does not require the lender to approve:

In a chapter 7, the redemption provision, section 722, actually states, "Tangible Personal Property" 722 Redemption allows you to redeem personal property (i.e. cars, ATV's, TV's etc) for current market value. However, 722 DOES NOT APPLY TO REAL ESTATE by its express language. In a chatper 7, section 722 is what allows you to cram down, but it cannot be used for real estate. So, under the technical meaning of "redeem", you cannot do a redemption cram down on real estate liens.

Another way to deal with liens is through section 522(f). This section is lien striping. However, this section is very limited, it only applies to involuntary liens (i.e. judicial liens and tax liens), and non-purchase money security interests (e.g. a title loan on a car). Unfortunately, a second mortgage is usually neither of those, and before you ask, yes, refi's of mortgages typically maintain their status as purchase money (not that it matters, because the non-purchase money part of 522(f) relates, again, to personal property). So you cannot lien strip the second mortgage in a chapter 7.

The only other BK option, presently, is a chapter 13 2nd mortgage lien strip, but 3 things are required here.
1. You are in a district that recognizes (most do).
2. The 2nd mortgage must be wholly unsecured
3. You need a discharge of your chapter 13.

Thus, the only way to deal with a 2nd mortgage on your primary residence, and your goal is to get a better deal, is to negotiate a reaffirmation agreement.