Being current on mortgage(s) and filing Chapter 7

[justbroke]

But here's my question: Why should the lender be influenced in his decision by your CH7 BK-filing? Their secured interest stays the same and the value of the property stays the same - so if it wasn't worth foreclosing on your home prior to your CH7, why should it be afterwards?

You have to think like a bank/creditor in order to understand how they mitigate loss. If you didn't file Chapter 7, the bank could take its time to foreclose, then do so when they are ready. They then sue you for any deficiency. They really have no losses in this particular scenario!

Now, if you file for Chapter 7 and surrender the home... they will lose money (period). They can't come after you for any deficiency, as the entire debt is discharged! If they want to mitigate their losses, they need to foreclose upon the property as quickly as possible.

Note: if you have private mortgage insurance (PMI) that may also influence the lender, but my post does not take that PMI into consideration. Also note that if you're in a non-recourse State, the lender will probably act more quickly to mitigate their loss even in a non-bankruptcy situation. It's all about mitigating loss.

[IBroke]

One other thing, I have read numberous posts where people literally filed a C13 in order to keep their home, so if being behind on your mortgage is perfectly fine, then why have so many who qualified for a C7 done a C13 just so they didn't lose their homes?

Well, because you have the OPTION to strip the second mortgage and catch up on the payments on your first if you are behind.

The statement "you have to be current on your mortgages TO FILE CH7" ist the problematic part because it's not correct if you simply look at the statement. This statement would mean "legally, if your behind, you can't file CH7." THAT is simply not true. CH7 just doesn't provide you additional protection if you are behind. Your liability is discharged - but that's about it. That's why I would say the correct way to put it is "you SHOULD be current when filing CH7 to protect your home."

When behind, filing CH13 is the wiser decision - but there is no legal basis to use the phrase "MUST"...

And if you are current on the first mortgage but waaay upside down on your LTV, filing CH7 might even be a good idea. After your discharge, you might be able to settle your second for pennies on the Dollar. Why do I HAVE TO be current on the second, probably waaay unsecured mortgage to file CH7? No way they will burn money and foreclose.

[IBroke]

You have to think like a bank/creditor in order to understand how they mitigate loss. If you didn't file Chapter 7, the bank could take its time to foreclose, then do so when they are ready. They then sue you for any deficiency. They really have no losses in this particular scenario!

Now, if you file for Chapter 7 and surrender the home... they will lose money (period). They can't come after you for any deficiency, as the entire debt is discharged! If they want to mitigate their losses, they need to foreclose upon the property as quickly as possible.

Note: if you have private mortgage insurance (PMI) that may also influence the lender, but my post does not take that PMI into consideration. Also note that if you're in a non-recourse State, the lender will probably act more quickly to mitigate their loss even in a non-bankruptcy situation. It's all about mitigating loss.

Point well taken and understood.

Now what if you are current on the first but behind on the unsecured second?

[justbroke]

Now what if you are current on the first but behind on the unsecured second?

I'll use the common legal explanation... it depends. (And I mean that in the nicest way possible.)

There are many competing factors, even on what you wrote in the response to justplaintired. The reason why I would only use "must" is actually in the legal context, if you want to have a legal leg to stand on. However, I concede that the counterargument has merit and I won't delve any further into that.

What I will delve into is with people who need the 1st or 2nd mortgage payment in order to qualify for the Chapter 7 discharge. A smart Trustee will (and I have seen cases on both sides of this), will notice that you are behind on payments. If the lender files a Motion for Relief From the Automatic Stay (MFRS), the smart Trustee will file a Motion to Dismiss Under 11 USC 707(b)(3).... "totality of circumstances". If the MFRS is granted, the Trustee will have a strong leg to stand on, and if you haven't been making payments and aren't current, the day of your Motion to Dismiss hearing will go down like this.

The Trustee will say that you in fact have no responsibility to pay as the MFRS was granted. They'll then say that you haven't even tried to be current (easy to present as evidence). Regardless of whether the foreclosure actually occurred, this means that the lender intends to take the property back and you will not be granted any reaffirmation on those terms. That means that the payments you used in order to qualify for that Chapter 7 discharge... disappear and are replaced with the meager "IRS Allowance" for rent in your County/State. This could mean that you are now over the magic $182.50 and can now afford to pay for a Chapter 13.

I have research several cases where this has happened. I don't want this to happen to other folks who assume that they have some legal standing when they are not current and file Chapter 7 and expect a.) to be able to use the mortgage, taxes and insurance as expenses on the means test in order to qualify, and b.) that they won't be foreclosed upon.

I don't suggest someone play this type of gambling if they really want to keep their home. I'm sure attorneys would concur, if advising their client in their best interest.

Now specifically to your 2nd mortgage question... it would be a gamble. Some people have taken that gamble and have made it. Some Trustees have disallowed the second mortgage expense in the schedules, so this just depends too.

[justplaintired]

I'll use the common legal explanation... it depends. (And I mean that in the nicest way possible.)

There are many competing factors, even on what you wrote in the response to justplaintired. The reason why I would only use "must" is actually in the legal context, if you want to have a legal leg to stand on. However, I concede that the counterargument has merit and I won't delve any further into that.

What I will delve into is with people who need the 1st or 2nd mortgage payment in order to qualify for the Chapter 7 discharge. A smart Trustee will (and I have seen cases on both sides of this), will notice that you are behind on payments. If the lender files a Motion for Relief From the Automatic Stay (MFRS), the smart Trustee will file a Motion to Dismiss Under 11 USC 707(b)(3).... "totality of circumstances". If the MFRS is granted, the Trustee will have a strong leg to stand on, and if you haven't been making payments and aren't current, the day of your Motion to Dismiss hearing will go down like this.

The Trustee will say that you in fact have no responsibility to pay as the MFRS was granted. They'll then say that you haven't even tried to be current (easy to present as evidence). Regardless of whether the foreclosure actually occurred, this means that the lender intends to take the property back and you will not be granted any reaffirmation on those terms. That means that the payments you used in order to qualify for that Chapter 7 discharge... disappear and are replaced with the meager "IRS Allowance" for rent in your County/State. This could mean that you are now over the magic $182.50 and can now afford to pay for a Chapter 13.

I have research several cases where this has happened. I don't want this to happen to other folks who assume that they have some legal standing when they are not current and file Chapter 7 and expect a.) to be able to use the mortgage, taxes and insurance as expenses on the means test in order to qualify, and b.) that they won't be foreclosed upon.

I don't suggest someone play this type of gambling if they really want to keep their home. I'm sure attorneys would concur, if advising their client in their best interest.

Now specifically to your 2nd mortgage question... it would be a gamble. Some people have taken that gamble and have made it. Some Trustees have disallowed the second mortgage expense in the schedules, so this just depends too.

I like this post and I couldn't agree more. Personally I think being behind on your mortgage while in a C7 is a gamble I wasn't going to take.

[IBroke]

I'll use the common legal explanation... it depends. (And I mean that in the nicest way possible.)

There are many competing factors, even on what you wrote in the response to justplaintired. The reason why I would only use "must" is actually in the legal context, if you want to have a legal leg to stand on. However, I concede that the counterargument has merit and I won't delve any further into that.

What I will delve into is with people who need the 1st or 2nd mortgage payment in order to qualify for the Chapter 7 discharge. A smart Trustee will (and I have seen cases on both sides of this), will notice that you are behind on payments. If the lender files a Motion for Relief From the Automatic Stay (MFRS), the smart Trustee will file a Motion to Dismiss Under 11 USC 707(b)(3).... "totality of circumstances". If the MFRS is granted, the Trustee will have a strong leg to stand on, and if you haven't been making payments and aren't current, the day of your Motion to Dismiss hearing will go down like this.

The Trustee will say that you in fact have no responsibility to pay as the MFRS was granted. They'll then say that you haven't even tried to be current (easy to present as evidence). Regardless of whether the foreclosure actually occurred, this means that the lender intends to take the property back and you will not be granted any reaffirmation on those terms. That means that the payments you used in order to qualify for that Chapter 7 discharge... disappear and are replaced with the meager "IRS Allowance" for rent in your County/State. This could mean that you are now over the magic $182.50 and can now afford to pay for a Chapter 13.

I have research several cases where this has happened. I don't want this to happen to other folks who assume that they have some legal standing when they are not current and file Chapter 7 and expect a.) to be able to use the mortgage, taxes and insurance as expenses on the means test in order to qualify, and b.) that they won't be foreclosed upon.

I don't suggest someone play this type of gambling if they really want to keep their home. I'm sure attorneys would concur, if advising their client in their best interest.

Now specifically to your 2nd mortgage question... it would be a gamble. Some people have taken that gamble and have made it. Some Trustees have disallowed the second mortgage expense in the schedules, so this just depends too.

Thanks for that great explanation!

For many people, this could actually mean they would have to file CH13 in order to secure their home because they don't have the option (funds) to bring their mortgages current prior to filing.

In our case, the first will be current after the HAMP modification but we certainly don't have $30K to bring the second current.

And true - I wouldn't feel safe if I would file CH7 and want to save my home with the main goal to get rid of the second mortgage. Nobody can assure that they will agree on a settlement - so why shouldn't I use those funds to pay for the CH13 and be on the safe side?

[justbroke]

In our case, the first will be current after the HAMP modification but we certainly don't have $30K to bring the second current.

I still think that your particular case, and others, have been able to do this modification inside or outside the bankruptcy and still keep their homes. I think that right now, with the housing market the way it is... lenders are bending over backwards to keep some people in their homes. (By some people, I mean those who appear to have steady income, have a good ratios (front-end an back-end debt-to-income ratios), and are willing to enter into a modification which puts most of the arrears back into the loan.)

The second may just never both you until a.) the home gets some equity which starts to look juicy to the 2nd mortgage holder (or JDB who purchased the debt and is in lurk mode), or b.) you go to sell the home, then they get to assert their lien.

Don't get me wrong... I'm actually considering converting to a Chapter 7 and doing the same thing with my second mortgage. I have a lot of work to do on a modification on my first (which I actually had approved for prior to filing, but filed bankruptcy to save my investment property). It's a work in progress. I should have just filed for a Chapter 7 to start with, but the real reason was to save my investment property. I ended up surrendering it anyhow.

[Ann]

Well, I find this whole thread very interesting. One thing I do not understand is the statement (made by justbroke) that some trustees will not allow the expense of a second mortgage payment in the schedules. Why? Don't understand that one. Also, I tried like crazy to get a loan mod on my first (CitiMortgage) but was denied because of too much debt. They told me to go seek the advice of a credit counselor or try to get the unsecured debts settled on and they will go back over my figures at that point and I MIGHT get a loan mod. However, with my second they gave me a temporary mod and cut my payments in half for the first year! How crazy is that? My first won't help because of too much debt. I will reapply after my discharge.

[IBroke]

Well, I find this whole thread very interesting. One thing I do not understand is the statement (made by justbroke) that some trustees will not allow the expense of a second mortgage payment in the schedules. Why? Don't understand that one.

If I understood justbroke correctly, he was saying that if you are behind on the second and haven't made any payments on that for quite some time and you seek a discharge on that debt, the trustee might claim: "Well, you probably won't pay your second mortgage in the future either so I won't consider it to be an "expense"."

As of today, we still don't know what the new principal balance after the HAMP-modification will be. If it stays high, we can take advantage of the fact that we are not in a hurry to file BK because the second mortgage will be unsecured - and stay that way for a while. We can then start to save some money every month - either for a CH13 IF the second decides to foreclose - although that's VERY unlikely - OR we wait a while and use the saved funds to offer a settlement on the second. In that case, time is on our side. The household-income would allow a CH7 or 13. If they take the settlement, my mother will file CH7. If not, the second gets nothing and the funds will be used to pay for the more expensive CH13.

[justbroke]

If I understood justbroke correctly, he was saying that if you are behind on the second and haven't made any payments on that for quite some time and you seek a discharge on that debt, the trustee might claim: "Well, you probably won't pay your second mortgage in the future either so I won't consider it to be an "expense"."

Exactly. However, not from the standpoint of the Means Test. The Trustee cannot legally argue that it doesn't belong on the means test. That has been pretty well regulate. If a Trustee were to argue about your 2nd that you're not paying and are discharging... they would probably file a "totality of circumstances" dismissal.

[liboton21]

I was told the same thing...if I wanted to keep the house, I needed to be current before I filed.

Hi Liz,

Was it from your lawyer in Inland Empire?

JustBroke,
Current, meaning no late fees?

[justbroke]

JustBroke, Current, meaning no late fees?

Current means that you are not even 1 day past due and that you don't have any other issues like escrow, taxes or insurance.

[liz417]

Hi Liz,

Was it from your lawyer in Inland Empire?

Yes, all six of them I consulted with before I filed (actually it would be 7 if you include my 1st attorney).

[liboton21]

Current means that you are not even 1 day past due and that you don't have any other issues like escrow, taxes or insurance.

My situation is this:

I'm currently on loan modification with BofA since last month. I have a 3.25 fixed for the life of the loan but my back-up was drained due to both car had a major repair. My wife was out of work so I file for another mod plus they have not included the property tax and insurance in the loan. I am 200K underwater in the house. Both 1st and 2nd were from BofA. Now, I 'm a month behind on the 1st plus late fees and two months on the second including late fees too. I spoke to BofA about the mod this morning and they told me I was denied since I already have a low interest rate and they are going to pay for my December property tax but they will include it on my loan. Yuck!

Looks like my hope for BK7 is out of the picture due to not being current and I have 65K of unsecured debt. Now, can I file for BK13? But when I do my means test for BBK7 I have a negative output. Does it mean I cannot do the BK13? Now if I got approve for 13, can I do a ride-through on the house?

[liz417]

Do you really want to keep a house that is $200k under water? You could do a lein strip in a ch 13. Is the mortgage doable if you include the 2nd in BK?