Mortgage and Foreclosure Law Blog

Hi Readers! So last time we were going over Bankruptcy and how it can help with foreclosure. I was going over the Automatic Stay that is put in place upon filing and how that stops collection activity. Of course foreclosure is collection activity. The banks don't just sit there and take it so to speak. They have options too. The most common is the Motion to Lift the Stay, which if granted allows the foreclosure to continue.

Now, what if the bank has already filed a foreclosure notice? Unfortunately, bankruptcy’s automatic stay won’t stop the clock on the advance notice that most states require before a foreclosure sale can be held (or a motion to lift the stay can be filed). For example, before selling a home in California , a lender has to give the owner at least three months’ notice. If you receive a three-month notice of default, and then file for bankruptcy after two months have passed, the three-month period would elapse after you’d been in bankruptcy for only one month. At that time the lender could file a motion to lift the stay and ask the court for permission to schedule the foreclosure sale.

Many of you know that consumers generally have two options for Bankruptcy, either a Chapter 13 or a Chapter 7. I say generally because there are other options; but they rarely apply. Just a side note, they are named after the Chapter they reside in, in the Bankruptcy Code. So let's start with how a Chapter 13 works to help.

Many people will do whatever they can to stay in their home for the indefinite future. If that describes you, and you’re behind on your mortgage payments with no feasible way to get current, one way to keep your home is to file a Chapter 13 bankruptcy.

How Chapter 13 works...in general. Chapter 13 bankruptcy lets you pay off the “arrearage” (late, unpaid payments) over the length of a repayment plan you propose—five years in some cases. But you’ll need enough income to at least meet your current mortgage payment at the same time you’re paying off the arrearage. Assuming you make all the required payments up to the end of the repayment plan, you’ll avoid foreclosure and keep your home.

What if you have 2nd and 3rd mortgage payments? Chapter 13 may also help you eliminate the payments on your second or third mortgage. That’s because, if your first mortgage is secured by the entire value of your home (which is possible if the home has dropped in value like so many these days), you may no longer have any equity with which to secure the later mortgages. That allows the Chapter 13 court to “strip off” the second and third mortgages and recategorize them as unsecured debt —which, under Chapter 13, takes last priority and often does not have to be paid back at all. For more information on what happens with a stripped off mortgage see my earlier post. We'll continue with Chapter 7 next time.

Hi Readers! Here at SJ Mobley & Associates we end up with a lot of questions from confused clients regarding charge offs of their second mortgage. Let me give you an example of what I'm talking about. Let's say you have two mortgages; the first is for $300,000 and the second is for $50,000. For simplicity let's say you bought your house two years ago and the house was worth $400,000. Thus two years ago you would have had $50,000 worth of equity in your home.

Let's jump forward to today. Now, in this housing market, your home has dropped in value and is only worth $250,000 (a very realistic situation for too many people). You now have no equity in your home. Now, finally let's say you can't afford to pay both your first and second mortgage. We offer solutions for lowering payments on both; but sometimes people get into a situation where they have to stop paying their second mortgage entirely.

This is a situation where your second mortgage would charge off as bad debt and become unsecured debt. The reason is that there is no equity in the home to foreclose on. Two years ago, in this situation, the holder of your second may have decided buy out the first mortgage and sell the home to recoup their $50,000. Now, that doesn't make financial sense. So in this situation, if you don't pay your second for at least 6 months, it will charge off as bad debt; but what does that mean?

That means the holder of your second makes an accounting entry and "writes off" the $50,000 you owe them as a loss. However, they will continue to collect on this debt. Usually they send it to debt collectors who will harass you for months. Eventually, if you are employed, they are likely to send the debt to a law firm to sue on, for collection.

So what have you done by letting it charge off? Most likely you have just bought some time. If you are judgment proof (no assets and either no job or living off retirement) then you have essentially rid yourself of this debt. If you are not judgment proof, like most of us, then this is not a good route to take. If you are in a situation where you can't afford your mortgage; but want to stay in your house, you need to get help. We consult for free everyday. The best options for most people include Mortgage Modification, Bankruptcy, and debt settlement. Call us for ideas on all three 303-488-3405.