I was right! (CA law regarding seconds)

[onwards]

I just had a call back from the lawyer I retained to validate my own research into the matter.

It was a delightful little call because what he said was: "I didn't think so, but turns out, you were right!"

That tickled me greatly, but is also, I think, important information.

So, the background and facts:

I filed for Ch7 last summer, and got discharged in December.
My wife was NOT included in the filing.
Our house has two loans on it - a primary at $570K, a HELOC at $125K.
The primary was modified by the lender last April but is still non-recourse (doesn't matter for the point of this post anyway).
The HELOC was refinanced at some point so it is recourse.
We are co-borrowers on both loans.
The house is worth less than $500K.

My question to the lawyer was:

After reading CA's First Action and One Action rules, it appears to me that if we simply stop paying the HELOC, the only option that the HELOC lender has is to go after the property. Am I correct?

And yes, I am indeed correct. Not only that, but my lawyer said that he thinks it is a good strategy considering the home valuation, and he is comfortable with my executing it (considering he will have to defend me should it ever come to court). The only risk (as expected) is that the HELOC lender will choose to simply "sit" on the loan until such time as the property appreciates to a level where it makes sense for them to take action against it, and then foreclose. I see this as rather unlikely.

The important part is that legally, there is nothing else they can do. They cannot, for example, sue my wife for the deficiency. That was probably the most crucial point in procuring this opinion.

What I anticipate will happen is that after 181 days, the lender will charge the loan off and sell it to a junk debt holder or CA, with whom I will be able to settle for 10-20% in return for removal of the lien. It might just be that the HELOC lender will deal before then, and I am in fact ready to offer 20% cash; my lawyer suggested that in the current environment, this is the most likely outcome.

There you go, folks. I am set on this course, but I was happy to have gotten a well-researched legal opinion and wanted to share with you should you decide to embark on the same. Personally, I think everyone in this position (value underwater on first, with a second hanging on) should do so. Hopefully this will give you a bit of extra incentive.

PLEASE remember that I AM NOT A LAWYER, and this is the interwebs, and thus my posting offers you no protection or in fact anything if things go wrong. I am simply posting my own experience and sharing what I discovered over the past four weeks.

[Whittier]

keep me posted. This is my plan......have anything else come from you plan yet?

[onwards]

keep me posted. This is my plan......have anything else come from you plan yet?

Not yet, but it's only rolled through the first 30-days friday. I don't expect any serious movement until at least 120 days out.

[HHM]

I am not sure why it took so long to figure this out...CA is a community property state. As such a non-filing spouse receives a "phantom" discharge to debts in the sense that the creditor cannot go after "community property", (i.e. your house).

So, the analysis is exactly right.
Joint HELOC on community property (the house)
One spouse files BK receives a discharge.
The discharge also applies to non-filing spouse (reason being, in CP state, all community property is part of the BK estate regardless if one spouse does not file).
HELOC is only left with a worthless foreclosure right.

In about 2-6 months, you will be able to settle the HELOC and have them remove lien for about 10%. In fact, you don't even need to wait for it to be charged off. Many lenders (servicers) are accepting these settlements directly.

[onwards]

I am not sure why it took so long to figure this out...CA is a community property state. As such a non-filing spouse receives a "phantom" discharge to debts in the sense that the creditor cannot go after "community property", (i.e. your house).

So, the analysis is exactly right.
Joint HELOC on community property (the house)
One spouse files BK receives a discharge.
The discharge also applies to non-filing spouse (reason being, in CP state, all community property is part of the BK estate regardless if one spouse does not file).
HELOC is only left with a worthless foreclosure right.

In about 2-6 months, you will be able to settle the HELOC and have them remove lien for about 10%. In fact, you don't even need to wait for it to be charged off. Many lenders (servicers) are accepting these settlements directly.

Thanks HHM.

I guess for my part, I wanted to make sure I rely on information obtained and paid for by what I consider a qualified source, rather than internet postings. I suppose I tend to be cautious in these kinds of things, where a lot of money is riding on the line.

As for the lender, we'll see; USAA have thus far shown very little interest in negotiating on anything, and they were the ones who drove me to Ch7 last year by being so obstinate. I suppose we could call them now, but I doubt they'll do anything.

[2manybills]

In about 2-6 months, you will be able to settle the HELOC and have them remove lien for about 10%. In fact, you don't even need to wait for it to be charged off. Many lenders (servicers) are accepting these settlements directly.

It looks like I need to stop paying my 2nd and then offer 10% after a few months.

[upward]

That is what I'm going to do! Keep each other posted! My first is 340K worth about 300K maybe. We were able to qualify for the 5 year rate freeze a couple of months ago so we won't be going up for another couple of years. It's an adjustable loan, so who knows at that point. The second is 75K with Wells Fargo. Both were discharged in CH. 7 BK Feb.2008. Have thought about renting too. So many things to think about. The second would get nothing if they chose to foreclose.

[onwards]

That is what I'm going to do! Keep each other posted! My first is 340K worth about 300K maybe. We were able to qualify for the 5 year rate freeze a couple of months ago so we won't be going up for another couple of years. It's an adjustable loan, so who knows at that point. The second is 75K with Wells Fargo. Both were discharged in CH. 7 BK Feb.2008. Have thought about renting too. So many things to think about. The second would get nothing if they chose to foreclose.

The discharge really makes this a no-brainer. It's the true ace up your sleeve. Think about it; even if the bank decided to buy off the first so they could take action against you, they know in advance they can't do that (since the debt has been discharged). It's pointless. So they won't. And they can't REALLY do this out of spite, for the simple reason that it would be a breach of fiduciary duty and open them up to shareholder class action.

I see three avenues:

1) they sit on the loan until the house appreciates enough to make action worthwhile in terms of recovery (good luck with that; don't forget that the statute of limitation in many states will make this strategy self-defeating in a few years)

2) they sell to a CA, with whom you deal later

3) they settle with you.

I am betting that 2 or 3 happens, because 1 carries liability. We'll see.

[upward]

Yep, I thought about this a while back, " What if I stopped making the 550.00 payment to my second?? There is no equity and we are also upside down on the 1st. People said, they'll foreclose on you. After reading all of these, it would be a lot of lost time and effort on their part to foreclose and get nothing. The payment on the first is manageable and we have lived in the house for 15 years. For now I'll save the 550.00 and see about negotiating a payoff with Wells Fargo. The lost equity on the 1st could realistically be made up in a couple of years if the market recovers. It's not that far off.
I appreciate all of the feedback. It is so helpful to read about others' experiences. This forum was a huge support for me when we were going through the BK.
Thanks everyone!

[onwards]

Update

I finally have updates - oddly, both from Friday.

GMAC - finally! - sent us the letter indicating our acceptance into the trial/workout plan for our loan. Payment dropped from $2912 to $2085. Assuming we pay it on time, and nothing material changes in our finances, do we get automatically accepted into HAMP then?

More interestingly, a senior USAA person in the mitigation dept asked my wife to send in an "offer of negotiation", a letter describing the status and how much she is willing to pay them to settle. Will be sent today. That's fascinating, considering just how obstinate USAA had been across the board. I think they realize their hands are tied here.

[upward]

Very good! Thanks for the update. We will be two months behind on Wells Fargo, our second, that has the balloon payment, on May 1st. We have not contacted them as of yet. We have a 5.375 % on the first for another 3 years, so we are paying that one and we'll deal with it when the time comes. Both 1st and second would be under water at this point.

[2manybills]

Wells Fargo - Update

We are 2 months behind on our Wells HELOC. Today, a Wells negotiator contacted my home. She told my husband that she was not calling to collect any money (no kidding), but that if we were having a hardship, she could offer us some options to help us out. My husband sent her to me, since I handle the bills. She was very nice and explained that we go through their loan mod dept and try to do a mod on our HELOC. I told her that I understand we can try to negotiate a settlement with Wells. She said yes, we could and gave me the fax number to send the letter to. Same fax I received from a rep at Wells last week and I was actually going to do the letter today. I'm starting at 10% and see where we go. She said that if they don't accept the settlement, that I am always welcome to try again. I'll keep posting as we go along.

[onwards]

We are 2 months behind on our Wells HELOC. Today, a Wells negotiator contacted my home. She told my husband that she was not calling to collect any money (no kidding), but that if we were having a hardship, she could offer us some options to help us out. My husband sent her to me, since I handle the bills. She was very nice and explained that we go through their loan mod dept and try to do a mod on our HELOC. I told her that I understand we can try to negotiate a settlement with Wells. She said yes, we could and gave me the fax number to send the letter to. Same fax I received from a rep at Wells last week and I was actually going to do the letter today. I'm starting at 10% and see where we go. She said that if they don't accept the settlement, that I am always welcome to try again. I'll keep posting as we go along.

Good going. I'm offering $10K on a $125K balance (8%). We'll see what happens. Letter being faxed in the next few minutes.

[SleepWellNow]

Onwards - Good for you! Can't wait to hear their response. We settled our second with Green Tree and just received the recorded Full Reconveyance. Yeah!!!
Paid $3,376 on a $62,000 loan. The BK made all the difference in negotiating.

[onwards]

Onwards - Good for you! Can't wait to hear their response. We settled our second with Green Tree and just received the recorded Full Reconveyance. Yeah!!!
Paid $3,376 on a $62,000 loan. The BK made all the difference in negotiating.

Yes, that's what I'm thinking - the BK, even though my wife did not file, effectively makes this HELOC truly no more than worthless paper. USAA are hard to deal with though, so I don't really expect they will take the 8% offer. With that said, I'm willing to go as far as doubling it - assuming they negotiate. And if they don't... who cares, right? if they really want to go a further quarter million out of pocket (to pay off the first as compared to house value in foreclosure, all while knowing they cannot collect on the deficiency due to the discharge) just for the pleasure of kicking us out, all the more power to them.