Second Mortgage Under Water

[bkondeff]

First Mortgage is $210m, House is worth no more than $180m. Second Mortgage is another $60m. Doing a Ch7 for my folks.

It was explained to me by an attorney that we can not discharge the second. We can vacate the Second Mortgage lenders right to ever come after my parents personally, but they will have the right forever to come after the property.

Does this seem correct?

I understand lien stripping and that a Ch 13 may allow this once a successful repayment plan is done. The risk here is the Ch 13 either fails or is discharged early for any reason.

[justbroke]

Does this seem correct?

No.

First Mortgage is $210m, House is worth no more than $180m. Second Mortgage is another $60m. Doing a Ch7 for my folks.

Okay, this means that the property is worth less than the value of the first mortgage.

It was explained to me by an attorney that we can not discharge the second. We can vacate the Second Mortgage lenders right to ever come after my parents personally, but they will have the right forever to come after the property.

Yes, you can discharge the second mortgage, I think you're just thinking of it incorrectly. A discharge removed your personal (in personam) responsibility for the debt. That means that they can not legally collect it from you or threaten to sue in order to collect, or take any other action to force you to pay. In a chapter 7, the 2nd mortgage would be listed as "surrender".

When you receive your discharge, you no longer need to pay the 2nd. The caveat is, that at any time the 2nd mortgage can foreclose at any time. They generally won't do this unless there's mortgage insurance int he mix, or the home actually starts to appreciate, and they feel they can get some return from foreclosing.

I understand lien stripping and that a Ch 13 may allow this once a successful repayment plan is done. The risk here is the Ch 13 either fails or is discharged early for any reason.

You understand the part correctly.

[bkondeff]

I think I get it now and that makes sense.

Unfortunately, when property values start to rise then you must concern yourself with a foreclosure notice at any time. This second is for $60m, so it's enough that the lender would continue to pay attention.

[justbroke]

Unfortunately, when property values start to rise then you must concern yourself with a foreclosure notice at any time. This second is for $60m, so it's enough that the lender would continue to pay attention.

In many cases, they write it off and sell it to a Junk Debt Buyer for a lot less (no one really knows, but we speculate 10% or less). Then the Junk Debt Buyer (JDB) sits around with his "investment" hoping to recoup it soon... or just sell it again to some other JDB!

[bkondeff]

I have seen some posts where others have offered to purchase the second at a discount. I have seen the number of 13% for some reason, I assume this is the estimated amount, just above what a Junk Debt buyer would pay.

If my parents do a succesfull Ch 7 and get a discharge, as long as they don't reaffirm their mortgage or second, if they walk away in the future from the home, there is no recourse that the lenders have? Is there any IRS liability for that?

[dm415]

210m? Is the m million???

[justbroke]

210m? Is the m million???

The poster must be an accounting person. "M" is thousand. "MM" is thousand-thousand or million.

So $210,000 is $210M, and $210,000,000 is $210MM.

If my parents do a succesfull Ch 7 and get a discharge, as long as they don't reaffirm their mortgage or second, if they walk away in the future from the home, there is no recourse that the lenders have? Is there any IRS liability for that?

Right, no recourse. There is no liability because it was included in Bankruptcy! However, you may still need to follow the instructinos in Pub. 982 regarding any 1099-Cs issued.

[Ineedhelp2]

The caveat is, that at any time the 2nd mortgage can foreclose at any time. They generally won't do this unless there's mortgage insurance int he mix, or the home actually starts to appreciate, and they feel they can get some return from foreclosing.

Once the second is stripped, do they have an indefinate amount of time they can foreclose?

[justbroke]

Once the second is stripped, do they have an indefinate amount of time they can foreclose?

This discussion is around a Chapter 7 filing, so there is no stripping of the 2nd mortgage/lien. So, the second would be discharged, and yes... they can foreclose whenever they want to, following your State's foreclosure process.