Iformation on written contract

[Mudcat]

Hello all,
First of thank you to all who have posted and provided this site, it has been so helpful to me and my family.
I did a search but could not find the info I was looking for.
My home is worth approx. $87,000, I owe $32,000 to Wells Fargo and $54,000 to my Grandfather. Since my Grandfather and I have a signed contract I was told from different lawyers that it would be accepted as secured, thereby reducing my equity in the means test.
But now my lawyers are saying that unless the contract passed through the court system it is invalid and will be considered non-secured.
As you can imagine this is a game changer and I was wondering if anyone else had any experience with this before I talk to my lawyer about the situation.
I live in NW Arkansas and am looking at filing a 13 in the near future.

Thanks

[StartingOver08]

I have a couple of questions. Did you sign a note and mortgage with your grandfather for the $54000? I am assuming the Wells Fargo mortgage is first, is that right? Is the mortgage with your Grandfather recorded in the public records? When did it get recorded (date)?

If you can answer these questions it may clear up enough information for us to help answer your questions.

[justbroke]

Well, the real key is whether your Grandfather recorded a mortgage/note (lien) on the property with the recorder of deeds for your locality! Not just that, your grandfather would have needed to record it within so many days (it varies by State, but generally a lien needs to be recorded in 14-30 days) of executing the mortgage/note.

Why are you filing Chapter 13? What are your debts like?

Unfortunately, Arkansas' homestead exemption is pitiful, but you could use the Federal Exemptions. However, that is only going to get you $20K or so (your may be able to double that if you're married).

You need to sit down with a good bankruptcy attorney or asset protection attorney to figure this out. In my view, you are currently exposed.

It's not that it "passed through the court system", it's that it was properly recorded. Most liens for a mortgage/note are recorded with your locality's Clerk of the Court as they maintain public records. It could be recorded with a municipality like a city or town, if that's how property records are recorded where you live.

[StartingOver08]

Well JustBroke chimed in with my concern - because if you have a private mortgage with a family member that is not recorded, then the lien is not perfected and the Trustee will be quite interested in your home since you show so much equity. Yes, this is a game changer.

[justbroke]

(You actually beat me too it StartingOver. You are correct as well.)

[Mudcat]

Thank you for the replies.
Unfortunately, my Grandfather did not file the lien with the county. I have a meeting with my attorney Wed to see what my DMI is and I guess we will do our best to figure it our then.

[justbroke]

Thank you for the replies.
Unfortunately, my Grandfather did not file the lien with the county. I have a meeting with my attorney Wed to see what my DMI is and I guess we will do our best to figure it our then.

If you're filing a Chapter 13, you could be paying as much as $1,000/month or more towards your unsecured creditors, in order to keep the Trustee from liquidating that asset.

[Mudcat]

Yes, but if I filed a 7 would I also not have to liquidate
that house anyway?

[justbroke]

Yes, but if I filed a 7 would I also not have to liquidate that house anyway?

There's a difference between the two. In a Chapter 7, you could "buy" back the equity from the Trustee and keep it. In a Chapter 13, you buy it back by paying the non-exempt value over the course of the Plan. So you get to spread it out over a longer period of time.

In either Chapter, if you can't afford to buy the equity, then the Trustee would sell the property and disburse the funds. Usually, however, this is less than the actual equity because you have things like commissions, recording fees, attorneys, etc. You can usually negotiate a lower value.

[Mudcat]

I see, Thank you so much!

[StartingOver08]

The key here is what is your home really worth?

Many people use tax assessed values - that is not the right value to use in this market. Remember, the tax assessors office keeps the values as high as possible to generate as much income as possible. Get an appraisal to determine true market value. If you want an idea of your home's value, get a CMA from a Realtor first. Make sure the agent is experienced and uses comparable sales only within the last 90 days. The CMA is free. This will give you a better idea of current value. Good luck.

[SweetGeorgia]

The failure to record the secured interest does NOT necessarily mean it's not good. He holds a mortgage on your house (a second, if he hasn't recorded but Wells Fargo has). I'm going with GA law here, but I think it shares a few things with Arkansas.

That debt can BECOME unsecured if you sold the house and didn't pay him off (in which case you'd still owe him the money, now unsecured). Or it could BECOME unsecured if Wells Fargo foreclosed (again, you'd still owe him the money). The recording thing is about giving proper notice to everyone else; but even an unrecorded mortgage is still good between the two of you.

Ask your lawyer if your grandfather COULD foreclose on you. If the answer is yes, that's a secured debt. Also ask whether your grandfather could record now. He'd have plenty of legitimate reason to do so, even if it does incidentally help you out.

(Actually, ask more than one lawyer. We're being sued on just such a note, I think because the other side's lawyer didn't know foreclosure was an option.)

[StartingOver08]

SweetGeorgia, the fact that the OP owes the debt to the grandfather is not disputed by the parties.

The issue is how the unrecorded debt is treated in the BK. In this case, the OP may have a real issue with the Trustee and the amount of equity that is showing in the property. The main issue is, this is a debt owed to family that has not been previously recorded so the Trustee may think the OP is trying to 'eat up' his equity by showing a note and mortgage to a family member. If the Trustee wants to, the Trustee can step into the shoes of the Grandfather and the OP would owe the money to the Trustee rather than the Grandfather! Look at this link: http://www.************************/...ded-mortgages/

[justbroke]

The failure to record the secured interest does NOT necessarily mean it's not good. He holds a mortgage on your house (a second, if he hasn't recorded but Wells Fargo has). I'm going with GA law here, but I think it shares a few things with Arkansas.

As StartingOver writes, the problem isn't with enforceability of the lien or security interest. The problem is that the Bankruptcy Code grants specific powers to the Trustee when it comes to debt that has a security interest in property (real property). For personal property, you're probably right, but real property is different under the Bankruptcy Code.

There are very specific portions of the Bankruptcy Code dealing with improperly recorded liens. One that isn't even recorded, should be afforded any of the exceptions for an improperly recorded lien. Some of the exceptions are when the County/Recorder themselves cause the delay, and other extenuating circumstances. In this case... no one even attempted to record one.

The Bankruptcy Law Network article which StartingOver points to is very interesting. In this case, instead of just liquidating the property, the Trustee took over as the lienholder. While the Debtor didn't have to pay anything or have the property sold, the Debtor still was indebted to the Trustee. As I reviewed that case (just now), it was not so much that the Trustee took over the lien holder's position, the Trustee actually avoided the unrecorded lien before taking the lien's position as "property of the Estate". 11 USC 544(a)(3)

That case in Riley had a lot more going on than just mere lien avoidance, as it also dealt with homestead exemptions as well.

Riley v. Sullivan (In re Sullivan)

Issue: May the chapter 7 trustee avoid an unrecorded lien, preserve the lien for the benefit of the estate and at the same time, subordinate the homestead exemption to the rights of the estate even though the time to object to the exemption has expired?

Holding: Yes

[SweetGeorgia]

I read all that stuff, and it's just so NOT this guy's situation. But that doesn't mean it wouldn't be applied to him, you're right. All the other cases seemed to be people trying to pull something over on the court.

What if grandpa comes up with enough money to pay off the 1st and forecloses? I'm probably more upset about the grandfather losing out than the OP.

(Also, if I don't move to Europe, I'm going to move to one of these states with the gigantic homestead exemptions.)