settling 2nd mortgage before filing chapter 7

[nichole04]

Hi, I am new to this forum and I am about to file for chapter 7 bankruptcy. I have already retained a lawyer and have filled out all of the paperwork. Here is my situation. I have just gotten a professional appraisal on my house which came back for $325,000. I owe $321,000 on my 1st mort., $30,000 on my HELOC, $83,000 on 3rd mortgage, and to top it off I have yet a 4th mortgage that was cross-collateralized with the HELOC that was for business inventory for $46,000. Should I try to settle these 2nd mortages before I file chapter 7 since I will be getting back a tax refund of approx $15,000? I also sold my inventory for $20,000 but my lawyer says it all has to go to the inventory loan but I wanted to use it as leverage to settle the inventory loan. We want to keep the house but get rid of the other mortgages. Will settling before we file disqualify us for the chapter 7? I know the trustee will take my refund if I don't do something with it and I won't be able to use it after we file to settle b/c they will take it. Any advice would be greatly appreciated!

[albacore44]

your situation sounds complicated. you got a lot of banks to deal with there as far as the mortgages, it depends. If you need the payments to all those mortgages to qualify for a Ch-7, i would say wait until after your discharge, otherwise the UST might object. Since your upside down you might also consider filing Ch-13 and stripping the Leins

[chad9162]

Try using the search feature before asking questions. Not being rude but this type of question has been asked many many many many times. In fact there's a recent post very similar talking about 2nd's.

What you purpose would be considered preferential payments. The trustee would object and seize that money making your BK hell! At the same time your attorney is correct when he said that money made from inventory should go back into pay that inventory loan. You cant use one loan to pay off another and think you'll get away with it. The trustee is trained to look for money, in fact he makes money when he finds it.

Honestly, with all those 2nd mortgages on the house, I think walking away and starting new would be the answer. If you stay and stay current on the 1st you could try and work something out with the 2nd, 3rd, and 4th mortgages after discharge. Technically you will owe nothing but they will still have their liens. You could stay in the house and wait and see what happens, meaning pay the 1st and wait. Maybe try 5-10% settlements but it will take time.

Really there is no reason the 2nd, 3rd, or 4th would negotiate with you prior to discharge. One, if they are smart, they know they'd have to give the money back when the trustee comes knocking, and Two, right now they can still sue you for the money, since the money was non purchase money (if your state allows this).

[nichole04]

My lawyer had informed me that I can't lien strip in a 13 since the balance owed on the first is lower than the appraisal. I have read many of the threads and I couldn't find one that related to me directly b/c I need to know if I should file my tax return before or after I file for ch. 7. Another problem with the inventory lien is that it ballooned 12-25-09 and I really need to either settle it or re-do it before I file. Otherwise I don't know what they will do after I file. I have lots of unsecured debt and a lot of it was business debt but I have personally guaranteed it. Also, I thought that paying the mortgage companies prior to bankruptcy wasn't considered preferential payments since they are secured by the house. My husband doesn't want to give up the house but getting rid all the other 2nd mortgages is the only way to keep it in my opinion. Also, the HELOC of $30,000 balloons a year from now. What a mess! Thanks for your help so far and any other advice any of you can give would be greatly appreciated!

[nichole04]

tax question settling 2nd

If I were to settle the 2nd mortgages prior to filing chapter 7 would I be liable for the taxes on the settled amounts if I file b/r after the settlement?

[HHM]

First, the odds of settling prior to chapter 7 are slim. There really is no motivation or leverage you have over the 2nd mortgage lender. The reason settlement works AFTER a chapter 7 is because the chapter 7 discharges your personal liability for the 2nd (or inferior) mortgage; thus, the lender is only left with a worthless foreclosure right.

[chad9162]

If I were to settle the 2nd mortgages prior to filing chapter 7 would I be liable for the taxes on the settled amounts if I file b/r after the settlement?

http://www.irs.gov/individuals/artic...179414,00.html

[chad9162]

I need to know if I should file my tax return before or after I file for ch. 7.

Honestly, I think a competent attorney would be a better advisor on that. I filed my taxes before BK but had no intent to file. Although my attorney said I had so much room in my exemptions it did not matter.

Another problem with the inventory lien is that it ballooned 12-25-09 and I really need to either settle it or re-do it before I file.

Not following your logic here since it would be discharged in BK. All they would have is a lien against your property. Are you hoping to lower it some how so you can negotiate a lower settlement later??? I think that would be a lost cause and better to negotiate after discharge.

Otherwise I don't know what they will do after I file.

They could foreclose, but then they have to pay off ALL OTHER LIEN HOLDER! Based on your numbers they're gonna take a huge lost. I don't think they're gonna spend money to lose more money.

Also, I thought that paying the mortgage companies prior to bankruptcy wasn't considered preferential payments since they are secured by the house.

I don't think its simple as secured vs unsecured, but I could be wrong.

Here's what I mean....
If the debt to the secured creditor is more than the value of the asset secured, the excess debt is not secured by the asset. This creditor is only a 'secured creditor' to the value of the secured asset. A payment to the creditor for more than the value of the asset will only reduce the security interest in the asset the amount of the value of the asset. The balance may be preferential to the extent that the payment exceeds the value of the security.

For example - if the creditor is owed $100 and is paid that $100, but the asset secured is only worth $60, the difference of $40 may be classified as 'unsecured' and may be preferential.

In your case 2nd, 3rd, and 4th could be considered unsecured creditors. I think a lawyer would need to be consulted.

When people talk about preferential payments and secured property, they are usually talking about trading cash for equity. So technically your net value hasn't changed.

My husband doesn't want to give up the house but getting rid all the other 2nd mortgages is the only way to keep it in my opinion.

Well you can do what others have done. Stay current on the 1st and negotiate after discharge.

[nichole04]

2nd mortgage and tax questions

Thank you to everyone for all of your advice. I just can't wait until this is all over! My attorney advised me that I needed to get my tax refund back first or the trustee will want to know what it is and then may take it all. Here in Georgia we have low exemptions and we don't get the federal exemptions. If we don't use our homestead exemption we can use maximum of $5000 towards other items or cash and our wildcard is only $600. I will have approximately $10,000 to do something with before I file or the trustee will take it. I was really hoping to settle maybe at least one of the mortgages with this money but it may mess things up to throw us into a ch 13 which I don't want to do and I may end up having to pay taxes on the forgiven amount anyways if I were able to settle prior to filing chapter 7. And
chad, I wasn't able to open that link...not sure what the problem was but it didn't take me to it. I have also read some things on other posts about filing a return and then amending it once the discharge has been completed. Would this be a way to preserve some of my tax return? I am not sure if I should ask a cpa this question. Also, my zillow appraisal is for $452,000 which is the same amount our county tax assessor has it appraised for. The certified apprasial I had done a couple of weeks ago came back for $325,000 so I am not sure which amount the banks, trustee, and judge will go by. This may also determine what I have to do about these 2nd mortgages. Any advice on these matters would be greatly appreciated! Thanks so much!

[chad9162]

chad, I wasn't able to open that link...not sure what the problem was but it didn't take me to it.

http://www.irs.gov/individuals/artic...179414,00.html

I have also read some things on other posts about filing a return and then amending it once the discharge has been completed. Would this be a way to preserve some of my tax return?

If your BK is discharged in 2010 the it'd apply to your 2010 taxes not 2009. So I don't think you need to amend. Just follow your attorneys advice and file your 2009 taxes prior to filing. My trustee asked what we did with our refund and we said living expenses.

Also, my zillow appraisal is for $452,000 which is the same amount our county tax assessor has it appraised for. The certified apprasial I had done a couple of weeks ago came back for $325,000 so I am not sure which amount the banks, trustee, and judge will go by.

Every District has their own standard by which they go by. In CA, I was allowed to use Zillow and Kelley Blue Book.

It sounds like you have a competent attorney. If you don't think he's competent then interview more attorneys and compare answers. It's FREE! That way you'll know if he's competent or not. Sometimes we worry about nothing. I think the key to BK is having a good attorney. An attorney will know the ins and outs of your district, very important.

[StartingOver08]

Zillow usually runs high in valuation along with most of the other automated valuation models. If you have an actual, recent appraisal (not a tax assessed value), use that value.

[chad9162]

Zillow usually runs high in valuation along with most of the other automated valuation models. If you have an actual, recent appraisal (not a tax assessed value), use that value.

I agree, and if you know a realtor he could give you a more accurate report.

[nichole04]

Thanks for updating the link Chad. It was very helpful! And thanks to everyone for their input! This forum has been very helpful and informative.