liens/foreclosure in BK

[Kingxray]

As some of you know we are in BK limbo with our C7. The UST filed presumption of abuse and then motion to dismiss and possible conversion to a C13. We have a hearing coming up where we will request to redo our B22, which the UST is okay with (I guess).

From what I understand from our lawyer, some things are allowed in C13 that are not allowed in C7.

We have a home in another state that we are surrendering that has equity in it but it also has a lien on it from my dad (who caused the whole BK). The equity left in the house will not cover the lien. We were hoping by surrendering UST could use the equity to pay creditors. The UST does not want the house because of the lien and made us a No Asset, no distribution case. The bank has already started the foreclosure process.

My question is: What happens when the house gets foreclosed on? What happens to the equity? Is it given to the lien holder (my dad)? Or in other words who gets what? Does the lien make a difference if we are in a 7 or 13?
Thanks. I wish we would have found this site before we filed. I've learned a lot here.

[StartingOver08]

You have a house that you are surrendering in another state. It has a first mortgage on it and a lien from your father. I assume that your fathers lien is junior to the first mortgage and that the foreclosure process has started. Since the Trustee has abandoned the property, the bank can continue the foreclosure process as soon as they lift the automatic stay or you are discharged, whichever comes first.

When the lender forecloses, they are establishing an EXCLUSIVE claim to your property and the foreclosure action bars any junior creditors. You father can only protect himself if he 'buys out' the first mortgage in front of him - or he buys it at auction. This is why jr liens usually carry a higher interest rate, the risk is higher so the rate is higher.

If, in an extreme example, there is a lot of equity in the property and the first is very, very small, it would make since for your dad to "buy out" the first mortgage to protect himself. But that is not the typical situation.

[Kingxray]

Yes you are understanding my story correctly and thank you for responding. The relief for automatic stay has been filed recently.

Okay, I think I get it. What happens to the "equity" once the house sells at auction? Who gets it, the bank? Seems like a waste to me that the UST wouldn't want this asset to pay creditors, after all they take everything else they can get their hands on.

[StartingOver08]

Can you give us the numbers? Its hard to really talk about it in the abstract. There may not be any actual equity by the time the bank adds on all of their fees! What is the current market value? What are the mortgages and liens values?

[Kingxray]

Sure. We currently have it on the market for 200K (dropped 50K because of the current market situation). We owe 133K. My father's lien is for 87K, so if everyone took their share there would be no equity but that is where I get confused. Thanks again.

[junker]

yes. that is right, i just called a foreclosure outfit yesterday, and asked similar questions, at the foreclosure sale, junior liens are wiped out, and if the house doesnt sell, or no bids, it is deeded to back to 1st. mortgage holder, to do with as he pleases.

[StartingOver08]

Really once the bank adds in their fees, which get extremely high very quick, there is going to be very, very little "equity".

[Kingxray]

Now I get it! Thanks. This question was driving me nuts!