Lien Striping Order of Priority

[Mik3]

Can someone clarify how the Order of Priority is commonly applied for lein stripping?

For example to application;

If the primary mortgagee is .......280K
The Heloc in second is ...............60K
SBA 7a loan in third for .............350K
690K

The property value is appraised at 475K

There is another SBA thats non secured at 60K

Would the lein strip apply to the second, thired, or would both qualify?

Thank You

[helpmeout]

IMO, you aren't going to be able to do a complete lien stripping as the appraisal came in higher than the first mortgage. If it had come in under the first mortgage, then there would be no problem. You really are better off consulting with an attorney in your area, s/he would be able to give you a better idea.

If I were in your shoes, I would be taking a serious look at just walking away from the house. And definitely would not reaffirm any of the mortgages.

[HHM]

First, I am assuming we are talking about your primary residence (where you live), correct?

Current law in chapter 13 requires all or nothing. There cannot be so much as $1 of value that touches the mortgage.

So, with an appraisal of $475K, you cannot strip ANY of the mortgages on your property.

In your case, the 1st mortgage is entirely secured.
The 2nd mortgage is entirely secured.
The 3rd mortgage is only "under" secured (not entirely unsecured).

A mortgage must be entirely UN-secured to be stripped.

In order to strip the 3rd mortgage, your home would need to be worth less than $340,000

Sorry...

I agree with Helpmeout...unless you have some access to cash to settle out the SBA loan (probably at least $135K, since that is the value of their secured interest), you should probably walk away. Since we are dealing with an SBA loan, I am guessing your debt is business related. The good news is, you can probably do a non-consumer chapter 7 (vs chapter 13) so long as the majority of ALL your debt (personal and business) is business related debt. The SBA loan already exceeds your other 2 mortgages...so the issue will be what other debts do you have?

[despritfreya]

One additional comment. The only way you are stripping off the SBA 3rd (assuming there is equity of any kind after consideration of the 1st and 2nd). . .

Is the SBA loan also secured by anything else such as a UCC-1 for business assets? If so, then you can do a cram down to approximately $135k of equity based upon your numbers. If there is no additional collateral, no cram down or strip off as was pointed out by the other posts.

Des.

[HHM]

Good point Desp...The rule in chapter 13 is that loans that are secured against ONLY the primary residence are subject to the all or nothing approach.

If the loan in question (the SBA loan) also is secured against, most likely, business assets, then you might be able to do a cram down. But here is the catch, you will have to pay the crammed value, $135,000 through the chapter 13 (or chapter 11). So in essence, you will have to pay off that loan, but assuming it can be crammed, you only have to pay the actual secured portion.

[Mik3]

Well thanks for the responses to my question. Know knowing that I cant go the direction of Lien Strip I wont wast more time looking into that as an option.

The first is my primary, and I do live there. The 7a is from a business acquisition that wasn't able to earn what the purchase was based on.

The business does have some assets where a UCC was filed against. But I don't think their value was greater than 60K, and in reality a few times lower in resale. I'm not familiar with the cram down, or what that 135K number is or represents. Need to look into that, and see if it can help keep the house.

I am also unfamiliar with the term non-consumer chapter 7, or how it varies. I don't have enough cash on hand to consider chapter 11, and not sure it wouldn't lead to 7 anyway.

As of now I am keep things currant, and maintaining, but my short term debt is pretty high, and I have a couple of other loans out like an equipment lease, and a vehicle note. I have enough cash to see through 45 days, but thats how its been on average since 1/2009.

Any info would be most appreciated

[Mik3]

Oh I see now. The 135 is the amount of the cram down on the 7a, therefore the balance payable would be 215K, not 350K.

I guess my first concern in going that way would be this: I file chapter 13, and cram down the loan to 215. Now some time down the road I'm still in hardship condition because the loan term hadn't changed and the monthly debt service is the same load (even though the total note is reduced) and that I still have all that unsecured debt too, and that I couldn't file chapter 7 because I enacted the cram down.

Would there be any concern of not being able to file chapter 7, and is there a time line if so?

MIK3

[despritfreya]

Hold on a moment. Don't get things confused. Based upon your numbers your 1st is fully secured. Your 2nd is fully secured. Those 2 add up to $340k. You state your home is worth $475k. That leaves $135k to support the 3rd position lien (SBA)

The only way to reduce the 3rd position lien to the equity in the property that supports it, is to make sure that the loan is secured by not just the home. You cannot modify the rights of a lender that is SOLELY secured by the debtor's principal residence. If the lender is not fully unsecured (no equity to attach to the lien position), the only way to modify its rights is to show that it has additional collateral. So, unless the SBA loan that is secured by your home is also secured by something else, no cram down to $135k (based upon your numbers, the value of the 3rd position lien).

Assuming there is additional collateral, in the context of a Chapter 13 you can reduce the $350k to $135k but you must pay the reduced amount with interest in equal monthly payments over the length of the Plan - no more than 60 months.

Assuming there is additional collateral, in the context of a Chapter 11 you can reduce the $350k to $135k and you can pay it out (with interest) over whatever time frame you want - could be 30 years. Chapter 11s have one huge road block. If the lender makes, what is called, an 1111(b) election - something a bit too complicated to explain here - you may be screwed. However, this is all a negotiation and if such an election is made you can try to negotiate a settlement by agreeing to increase the "secured" claim. Just did this in one of our cases - we bought the lender's 1111(b) election by agreeing to a higher value, interest at 5% and amortized over 30 years. Not a bad deal for the debtor.

As to the cost of the 11 - shop around. You may be surprised.

Des.

[Mik3]

I see, that makes sense. I think there is a UCC filing on the business assets, and believe the business can support that amount of debt service ongoing. Still unfortunate that I cant be rid of the second, but if I can keep the business, and my home it's a pretty good option for me. Having young kids, loving where we live, and the thought of laying off my employees are all reasons to keep fighting to make it work.

Combing those factors with being self employed for as many years, in our economy, with my previous work experience and education, don't think I would be able to find better opportunity than my business offers. I just need to strip off as much short term debt as possible too.

I wouldn't blink an eye at the debt I pay every month if I were able to sustain it, and my personal expenses.

I will look into the comps on ch 11 vs. 13, and try to find a lawyer who has my best interest in hand, and doesn't view me as another case to meet his quota.


Thanks for all your replies and comments. I have been able to lean more in this thread than a month of reading.

[Mik3]

Met with attorney today asking about ch 13 cram down on SBA loan, and his response was that you cannot cram down an sba loan in a chapter 13 (business debt). He also said that it would need to be done through a chapter 11, but that he didn't recommend it because the debt wont be abolished through a cram down there either. He claimed that the debt is most often voted down by the lender who holds the loan and that they get to vote in the outcome decision. He suggested between that and the expense an 11 may not be a good fit. Furthermore he added that the most he is seeing is that the term is modified, and he is not seeing principal reduction on SBA loans.

Attorney was very smart, experienced, and confident. I have a sense of trust with him, but I'm very conflict based on what was written in this thread in comparison.

[justbroke]

I don't read any conflicting information here. Every post indicated that the 4th position SBA loan is "partially secured" and that you can't strip the lien and can't cram it down! There was a suggestion that you might be able to cram it down IF it is also secured by other property -- such as business inventory or equipment.

Your attorney opined that you "can't" (or did he say won't be able to?) cramdown the loan because it is true when the loan is at least "partially secured" and the security is solely the principle residence.

Des, who is very experienced, showed some ways that things are done in Chapter 11s where I opine that discharged are "bought". (Yes, I said it, and didn't GM just do the same thing? Purchased a discharge.... the fastest discharge in Chapter 11 history!)

[despritfreya]

Met with attorney today asking about ch 13 cram down on SBA loan, and his response was that you cannot cram down an sba loan in a chapter 13 (business debt).

You cannot cram down the debt in a 13 (or an 11) if the SBA’s loan is secured ONLY by your home. If it has additional collateral for the same loan then yes, you can cram it down. Unfortunately, you would have to pay the cram down amount over 5 years. Assuming the lender has additional collateral, this is probably why the attny said it can’t be done. You simply can’t afford it.

He also said that it would need to be done through a chapter 11, but that he didn't recommend it because the debt wont be abolished through a cram down there either. He claimed that the debt is most often voted down by the lender who holds the loan and that they get to vote in the outcome decision.

Either you misunderstood what he said or he does not do many individual Chapter 11s.

1. If you have an impaired class that votes for the Plan it does not matter what any other creditor says. Getting an impaired class is usually very easy if the attny knows what he is doing. I think my Firm has only had 2 cases in recent memory where we could not find an impaired class to defeat the voting issue.

2. Cram down does become a problem if the secured creditor takes the 1111(b) election. However, as I said before, you can negotiate this issue. If negotiations fail then, yes, the cram down basically is ineffective and you are screwed.

He suggested between that and the expense an 11 may not be a good fit.

Again, shop around. While I am not in your State I can tell you that we can run a well planned 11 for as little as $8,000.00. That is not to say $8k is the norm for us since most of our cases require a lot of litigation. But, in the ones where they are nothing more than “over blown” Chapter 13s, $10k or less is typical. This puts them almost even with the overall cost of a Chapter 13. I do not know what things cost in CT but don't just go by one consultation. Of course, if the SBA does not have additional collateral this is a non-issue.

Furthermore he added that the most he is seeing is that the term is modified, and he is not seeing principal reduction on SBA loans.

If the loan does not have additional collateral you cannot modify its terms under bk law. You would be looking at a modification outside the context of bk - something the lender has to agree to. If the lender is not willing to work with you in this regard there is nothing you can do about it.

Des.

[Mik3]

You cannot cram down the debt in a 13 (or an 11) if the SBA’s loan is secured ONLY by your home. If it has additional collateral for the same loan then yes, you can cram it down. Unfortunately, you would have to pay the cram down amount over 5 years. Assuming the lender has additional collateral, this is probably why the attny said it can’t be done. You simply can’t afford it.

SBA is my only secured debt I have interest in reducing. Loan is secured against primary residence and with UCC on business assets.


Either you misunderstood what he said or he does not do many individual Chapter 11s.
Quite possible on both fronts, hard for me to tell to be honest.

1. If you have an impaired class that votes for the Plan it does not matter what any other creditor says. Getting an impaired class is usually very easy if the attny knows what he is doing. I think my Firm has only had 2 cases in recent memory where we could not find an impaired class to defeat the voting issue.
So if I understand this; the SBA banker is the impaired, and that he alone (because there are no others in the same category as secured and being flied against) will vote on my plan for 13. If he has no motive to cooperate, or is pressured from his constituents to argue, I could wind up with little or no cram down affect, regardless of whats secured or not by my collateral in my assets, right? Doing so by evoking the 1111(b) mentioned below.

In reference to what attorney says about not seeing principal reduction, only term modification, do you think this could be true because of aforementioned scenario, and or something thats locally driven by the powers that be?

2. Cram down does become a problem if the secured creditor takes the 1111(b) election. However, as I said before, you can negotiate this issue. If negotiations fail then, yes, the cram down basically is ineffective and you are screwed.




Again, shop around. While I am not in your State I can tell you that we can run a well planned 11 for as little as $8,000.00. That is not to say $8k is the norm for us since most of our cases require a lot of litigation. But, in the ones where they are nothing more than “over blown” Chapter 13s, $10k or less is typical. This puts them almost even with the overall cost of a Chapter 13. I do not know what things cost in CT but don't just go by one consultation. Of course, if the SBA does not have additional collateral this is a non-issue.



If the loan does not have additional collateral you cannot modify its terms under bk law. You would be looking at a modification outside the context of bk - something the lender has to agree to. If the lender is not willing to work with you in this regard there is nothing you can do about it.

Des.

Good Stuff! Thank You for the time!
M

[despritfreya]

So if I understand this; the SBA banker is the impaired. . .

No. In the context of a Chapter 11 you have to find an impaired class to defeat the "no vote" that will most likely come from the crammed down creditor.

Assuming you have another secured creditor (like a car) or owe priority taxes, a smart attny will know how to “create” an impaired class by agreement with the creditor and obtain a “yes” vote. If you cannot find such a creditor you will not be able to confirm the Plan over the SBA’s "no" vote.

In one of the case we “lost” we tried to create an impaired class by utilizing the County Treasurer for back property taxes. Unfortunately that “game” did not work because all the mortgage lender had to do was advance funds to pay the taxes as was allowed under the Deed of Trust. No taxes, no other creditor, no impaired class and no ability to confirm a Plan. Client walked.

Again, even if you can find an impaired class if the SBA takes the election you will have a problem.

In reference to what attorney says about not seeing principal reduction, only term modification, do you think this could be true because of aforementioned scenario, and or something thats locally driven by the powers that be?

Driven by the powers that be.

Des.

[Mik3]

Assuming you have another secured creditor (like a car) or owe priority taxes, a smart attny will know how to “create” an impaired class by agreement with the creditor and obtain a “yes” vote. If you cannot find such a creditor you will not be able to confirm the Plan over the SBA’s "no" vote.

I believe what you say even though it sounds odd. Does the vote than get determined by majority, and is there a precedent on the vote by value of the debt?

Again, even if you can find an impaired class if the SBA takes the election you will have a problem.

I'm beginning to realize that there is no easy path in this and that the more I examine it that a workout may be the best initial approach followed up by a ch 7 if unsuccessful.

Coming from a different angle though I wonder about the possibility of a chapter 7 and not having the residual SBA lien on the primary residence?


M