Interest accruing

[cookiemom]

Please explain to me how interest on a 2nd mortgage (line of equity) that was included in BK7 (not reaffirmed) can continue to collect interest if the "debt" is discharged and it only now exists as a lien. I am now facing the lien holder (from an 80/20 split) threatening to foreclose on the property. 1st mortgage was reaffirmed through government loan modification program, while second stayed silent. Now that housing market is favorable they have tacked on $60k of interest and seeking resolution or they want to foreclose take all equity (that I have honest/harding earning contributed for 13 yrs).

FYI in Michigan

[justbroke]

Welcome to BKForum!

A very common misconception is that the debt (itself) is discharged in a bankruptcy. This is actually incorrect. The discharges takes away the debtor's personal responsibility to repay the debt (in personam). The debt still exists and all the contractual conditions spelled out in the Mortgage/Deed of Trust and the Promissory Note are actually still in full force and effect. The only thing that changed is that the creditor cannot collect personally from the debtor.

This is why they can still foreclose. They just can't purse the debtor (personally) for any shortfall -- also known as a deficiency.

From about 2008-2015, strategically allowing the 2nd mortgage to be "discharged" (as to personal responsibility to pay) was a good thing. Many of the creditors would negotiate and take as little as 10% to settle that junior lien. My bank actually just forgave the entire thing and released their lien. I didn't see that coming at all (in 2012).

Some creditors that hold/held second mortgages (or other junior liens) were smart to just wait it out. They get to accumulate fees and interest, and when the market improves, they pounce. They can't sue you personally, but certainly can foreclose against the property. I think this is where you find yourself. I don't see that you have any recourse but to cure the defect, refinance the debt (to pay it off), or face foreclosure.

(I have not actually seen what's happening to you ever happen. It was theoretical, at best. It appears that some creditors laid-low and waited to pounce. This is a side-affect of discharging the responsibility to pay without negotiating a payoff while the market is on the downside. A Chapter 13 lien-strip behaves differently where the lien would actually be stripped off at discharge. Unfortunately a Chapter 7 doesn't have that power.)

[cookiemom]

Thanks! Yes, this does appear to be what is happening...and I am sick to my stomach about it. I have multiple emails asking my BK7 attorney for further explanation or action I should take (over the course of 10 yrs) now...after I am in a good financial place, I am going to lose all equity I have put into home and pay "today's market value" as if I am rebuying home with nothing down. I do not have the option to move, where I live is close to family that I need for childcare support. I have worked so hard to get back to where I am, and I thought I was settled. I have sent each loan servicer - release lein letters with a settlement offer randomly. First RTS and now its with SLS but I think still owned with Bank of New York Mellon. I want to scream!

[justbroke]

I have multiple emails asking my BK7 attorney for further explanation or action I should take (over the course of 10 yrs) now...after I am in a good financial place, I am going to lose all equity I have put into home and pay "today's market value" as if I am rebuying home with nothing down.

I don't think a bankruptcy attorney should answer that question. That's a personal opinion. Attorneys, if they were to answer any questions related to financial planning, will dance around it in a bankruptcy context. I'm guessing that your attorney danced around that question or just didn't answer it.

[bcohen]

I have multiple emails asking my BK7 attorney for further explanation or action I should take (over the course of 10 yrs) now...after I am in a good financial place, I am going to lose all equity I have put into home and pay "today's market value" as if I am rebuying home with nothing down.

The lender (which might be a JDB or other company which specializes in buying defaulted loans) is not an idiot. They understand that even in today's hyper-inflated housing market, there are costs to foreclose, and a house will never sell at foreclosure for anything close to what it would fetch at a traditional sale. They are reaching out to you to see if you are able to offer a reasonable settlement, or are willing to enter into a workout payment plan for this obligation. If not, then they can use the threat of foreclosure to get what they can for this non-performing loan.

At this point, I would suggest contacting a realtor or attorney to see how much your house is realistically worth, and how much equity really exists (assuming a traditional sale). An attorney could advise you what the costs would be for the lender to foreclose, and what the house might reasonably fetch at auction. Based upon that, you should be able to offer the lender a reasonable settlement or enter into a workout payment plan to resolve this debt. And of course you must receive written confirmation of any settlement or workout plan from the lender, in case they try to come after you for more money later.

Hope that helps.

[cookiemom]

Yes makes complete sense...this just seems so messed up that since BOA held the 1st and 2n during the time I was approved for the government loan mod through them they would not mention the 2nd. My settlement letters have been ignored up until this moment when market is good (13 yrs latter) to swoop in and recovery their full losses (taking any equity now in home) that were technically granted with the reduced interest rate gov. program.

[cookiemom]

I don't understand why they won't negotiate with me...they just keep asking to see the pay off of the 1st mortgage. Can't we just agree on a number and I'll do a refi to combined the two?

[flashoflight]

I don't understand why they won't negotiate with me...they just keep asking to see the pay off of the 1st mortgage. Can't we just agree on a number and I'll do a refi to combined the two?

It doesn't seem like you are negotiating a settlement in good faith since you are refusing to give them the payoff of the 1st mortgage. If I were the investor on the 2nd, I'd move to foreclose on you ASAP because of lack of good faith in case there is another foreclosure moratorium. They're entitled to ALL of the difference between the 1st and what the house would fetch in a foreclosure sale. Foreclosures fetch a lot less money that what zillow and redfin says because they're all cash, buyers assume there is a lot of deferred maintenance, and most non-investors won't buy them. You want to mod the 2nd with principal reduction/forgiveness of interest+fees and then refi but that ain't happening in 2022 with the hot real estate market. Instead, you need to refi at today's much lower interest rates and payoff both liens in full with interest and fees. At least the BK removed your obligation to make payments on the 2nd so theoretically you can refi as long as you're current on the 1st. If you don't have enough equity to refi with full interest and fees on the 1st and 2nd, you need to sell the normal way ASAP before the foreclosure wipes out any equity you have left.

I'll also warn you that once the 2nd files the foreclosure papers, the lender will be very unwilling to pause or delay any further without a verified pending sale. They're not going to take your word for it that there is a buyer waiting in the wings.

[despritfreya]

I don't understand why they won't negotiate with me

Because there is no law that requires the lender to agree to take anything less that what is owed under the contract.

...they just keep asking to see the pay off of the 1st mortgage.

Lender wants the payoff on the first to determine how much equity is in the property after consideration of the first.

Can't we just agree on a number and I'll do a refi to combined the two?

If there is little to no equity after consideration of the 1st maybe the lender will negotiate. If there is sufficient equity maybe the lender will not negotiate. Either way, it is up to the lender.

Des.

[cookiemom]

Would the SOL apply to the accruing interest at least (forcing them to legally reduce the obligation a little bit)?

[bcohen]

I don't understand why they won't negotiate with me...they just keep asking to see the pay off of the 1st mortgage. Can't we just agree on a number and I'll do a refi to combined the two?

It is common sense that the lender will not negotiate without knowing how much is still owed on the first mortgage, as that determines how much (potential) equity exists. Attempting to "negotiate" without disclosing this important information is about as reasonable as attempting to "negotiate" the sale of a used car, but refusing to tell the prospective buyer how many miles it has, or allowing them to test-drive it. I am actually surprised that they need you to tell them this information, as I would assume they could obtain it directly from county records and your credit reports.

Needless to say, you have nothing to lose at this point by disclosing whatever information their loss mitigation people request. Most likely, if you provide the necessary information, they will agree to remove some of the interest and late fees--but obviously not all of it--and to allow you to start paying on the loan again. If for some reason, they demand more than the realistic equity securing this loan (based upon a conversation with a professional realtor or attorney) you can always file for Chapter 13 bankruptcy, and let a judge dictate the amount and terms of repayment.

[flashoflight]

I am actually surprised that they need you to tell them this information, as I would assume they could obtain it directly from county records and your credit reports.

Actually no. I've been through this too, and there are a lot of junk fees not included in the credit report and the NOD so the credit report is often wrong by quite a bit. The junk fees will be in the NOS, but the foreclosure is for the 2nd lien and not the 1st. The OP needs to order the 1st mortgage payoff, agree to pay the junk fee of $25 or whatever for the payoff, and forward the payoff letter to the 2nd lender. If anyone is filing BK with a property in foreclosure, your attorney will want the payoff statement from the lender or the foreclosing law firm too. The credit report amount is not good enough.

[cookiemom]

flashoflight what ended up happening. What was your resolution

[flashoflight]

cookiemom
Mine was a chapter 13, so I ended up on a payment plan that consisted of paying mortgage arrears over 5 years on the 1st and 2nd which meant the credit cards got paid nearly nothing (13 as a backdoor chapter 7). Both mortgages were going to foreclose on the same day if I didn't file BK. After the BK filing, it seemed like the 1st was willing to talk in good faith about a loan mod while the 2nd was completely uninterested. I could have forced the loan mod app on the 2nd via the court's LMM program, but the high cost and uncertain probability of success made me give up on that in favor of a refinance. There was sufficient equity to foreclose and pay off the 2nd at 100%. Because the HELOC was going to require a much higher payment in the 4th year of BK, I needed to get rid of it. So I refi'ed both mortgages to a single new mortgage at 2.25% 15 year with no bankruptcy baggage like not having online access. I was current on my house for the first time in years. The NOD and NOS were no longer valid. The 15 year instead of a 20/25/30 was to avoid giving the unsecured creditors an increased dividend. The final monthly mortgage payment was similar to the monthly trustee payment (mortgage arrears) + monthly 1st + monthly interest only 2nd. Without rates going down so much last year, refi would not be possible since the new mortgage has to pay down principal unlike the first 10 years interest only of a HELOC. Most of the lender's legal fees from the foreclosure and the bankruptcy had to be repaid on both mortgages, but around $1k in late fees magically disappeared during a mortgage servicer transfer. I'm not one to complain about a gift.

[justbroke]

Would the SOL apply to the accruing interest at least (forcing them to legally reduce the obligation a little bit)?

There are some interesting cases in Florida related to mortgages and the SOL. One of which is that each payment missed created a 5-year SOL individually. So a missed payment on 1/1/2010 would be barred after 12/31/2014, but the 2/1/2010 payment would be barred after 1/31/2015 and so on and so fourth.

If your State is anything like Florida, the SOL defense could be a non-starter. In Florida, the entire landscape installments payments in a mortgage and the statute of limitations was completely changed by a decision in 2018. Florida is now pretty consistent that "a lender is entitled to recover all outstanding payments upon maturity or acceleration, even those that came due more than five years earlier."

It completely caught me off guard as I was trying an SOL defense at that time. That ruling means that they can collect even what appears to be time-barred debt.

You would have to check to see how your State handles this.

Reference Grant v Citizens Bank (Florida) https://www.jdsupra.com/legalnews/gr...florida-30965/