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Chapter 13 Mortgage Lien Strips.

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  • Chapter 13 Mortgage Lien Strips.

    Here is some basic information about doing chapter 13 lien strips.

    Applicable BK code section. 1322(b)(2).

    What is it: In a nutshell, you can remove an inferior lien (i.e. 2nd mortgage, HELOC etc), from your primary residence in a chapter 13 if the value of your home is less than the superior lien (i.e. 1st mortgage)
    Example, Home A
    1st Mortgage, $160,000
    2nd Mortgage, $40,000
    Home Value, $155,000
    In a chapter 13, you can remove the 2nd mortgage on Home A
    Home B
    1st Mortgage $180,000
    HELOC $50,000
    Home Value $190,000
    You CANNOT strip the HELOC from Home B, nor can you reduce the principle amount of the HELOC.

    What you need to do to strip a lien:
    1. Pay for a professional appraisal of your home from a certified appraiser.
    2. File your chapter 13 BK and state in your chapter 13 that you are striping the lien
    3. File a motion to remove the lien (attaching a copy of the appraisal).
    Local procedures may vary on exactly what you need to do.

    RISKS (the catch).
    In order for the lien strip to stick, you must receive a discharge of your chapter 13. If your chapter 13 is dismissed or converted to a 7, you will lose the lien strip and more than likely lose your home because you have not been paying your 2nd mortgage during the chapter 13 (it would be very hard to get caught up). If during the chapter 13, you become eligible for a chapter 7, you should first look at requesting a hardship discharge of your chapter 13 under BK Code 1328(b) to preserve the lien strip.
    UPDATE 1/19/12 = courts are now split on the idea of whether you need a dischargeable chapter 13 to strip a mortgage. Some districts allow a inferior mortgage lien strip in non-dischargeable chapter 13's; but to do so you must have a good faith basis for filing the 13, filing the 13 for the sole reason of stripping the 2nd mortgage is not enough, you need some other reason for the 13 (get student loans under control, get caught up on the first mortgage, etc).

    Thus, even if you are eligible for a lien strip, if your budget is tight or there is a greater than average risk of you not being able to complete the 13, a lien strip may not be in your best interests (assuming you want to keep the home). After all, only about 40% of chapter 13's actually make it to discharge.

    Note, these rules do not apply to investments properties, you can modify the mortgages of investment properties in a chapter 13.
    Last edited by HHM; 01-19-2012, 01:57 PM.

  • #2
    Thanks for that info.
    Your stat of 40% makes me a bit nervous. I'm 1/2 way through a 13 waiting until Feb for actual filing and we have a lien strip too.

    Comment


    • #3
      Do you have put at least your second mortgage monthly payment amount in the repayment plan? Is it a good idea then to first get a modification to you second mortgage first, and then to file bankruptcy chapter 13?
      What if you pass the means test (above median with negative 22C), but have also negative DMI on your schedule J (if you add your second mortgage to it)?

      Here is the link to the post where I explained my situation, and asked some questions, but I am still hoping that somebody can answer them for me.
      http://www.bkforum.com/showthread.ph...ear#post225775

      Thanks!

      Comment


      • #4
        Please help, Needed value and timing

        Please help me wish two questions:

        Timing: we had to rush our Chapter 13 filing, due to foreclosure (lies from Countrywide).

        We want to strip our second.

        1. Our attorney said to wait until after the first meeting of creditors for appraisal and change, Is that correct?

        2. We took an 80/20 Loan: $100K and $25K, We now owe, with past dues and Escrow difficiencies a total of about $118K to the first and $24K to the sevond. $18K is going into the plan. My lawyer said the the appraisal must be below the $100K of the original loan taken. Not the $118K total that we owe our first Mortage. Is that correct?

        Comment


        • #5
          As to

          #1. That is fine. You don't have to wait, but there is no harm in waiting either. The true cut-off would be "confirmation".

          #2. I am not 100% sure. I can certainly understand why your attorney thinks that. (the foreclosure costs, escrow deficiencies, and fees are contractual obligations as part of the underlying mortgage contract but not, strictly speaking, part of the secured debt). Past dues (arrears) do not get "added" to the principal as part of the valuation (the bulk of the payment is interest anyway), those are payments you should have made but didn't, they don't increase the amount actually owed on the lien. However, I would press your attorney for a justification and see what he/she says. But I believe your attorney is correct.

          Comment


          • #6
            How Hard is This Issue to Litigate?

            Do banks typically challenge the real estate assessment, i.e., if you go into BK court and say your house is worth less than the first, is that challenged?

            Comment


            • #7
              Originally posted by mfez View Post
              Do banks typically challenge the real estate assessment, i.e., if you go into BK court and say your house is worth less than the first, is that challenged?
              Generally not, but since you are the moving party (i.e. the one requesting the strip down), the burden is on you to present credible evidence of the homes worth. A zillow.com or other web based valuation is not sufficient. At the very least, you need a realtor to do a CMA (Competitive Market Analysis).

              Comment


              • #8
                Is it normal to have to bring the realtor to court to testify? I was told by an atty that if we did the lien strip we would need someone to testify rather than simply a written appraisal.
                1/15/10 Filed ch7 2/18/10 314 meeting
                2/22/10 Report of No Distribution
                4/20/10 Discharged 5/20/10 Closed!

                Comment


                • #9
                  Originally posted by pcn View Post
                  Is it normal to have to bring the realtor to court to testify? I was told by an atty that if we did the lien strip we would need someone to testify rather than simply a written appraisal.
                  If the lender contests the valuation, then yes. If not, then usually no.

                  Comment


                  • #10
                    Is there anything specific to askfor, or is asking for a CMA enough to let the realtor know what I need? Do I need to specifiy that it is for a quick sale, or within a certain time frame?
                    1/15/10 Filed ch7 2/18/10 314 meeting
                    2/22/10 Report of No Distribution
                    4/20/10 Discharged 5/20/10 Closed!

                    Comment


                    • #11
                      Originally posted by pcn View Post
                      Is there anything specific to askfor, or is asking for a CMA enough to let the realtor know what I need? Do I need to specifiy that it is for a quick sale, or within a certain time frame?
                      It is my understanding, that CMA's have there own internal criteria (but I am not a real estate agent, so I don't really know for sure). But there is no harm in asking for both a Current Fair Market Value, and then a Quick Sale Value...(Quick Sale value tends to simply be minus 10-20% off of Fair Market Value).

                      Comment


                      • #12
                        Thanks, I will ask for both of those. For some reason I thought the court would use the Quick Sale Value is that right?
                        1/15/10 Filed ch7 2/18/10 314 meeting
                        2/22/10 Report of No Distribution
                        4/20/10 Discharged 5/20/10 Closed!

                        Comment


                        • #13
                          It is very interesting information. Thanks.

                          Can you please clarify the statement you write:

                          "Note, these rules do not apply to investments properties, you can modify the mortgages of investment properties in a chapter 13."

                          Comment


                          • #14
                            Originally posted by BKFreedom View Post
                            It is very interesting information. Thanks.

                            Can you please clarify the statement you write:

                            "Note, these rules do not apply to investments properties, you can modify the mortgages of investment properties in a chapter 13."
                            The chapter 13 section of the BK code specifically restricts what you can do with the mortgages on your "primary residence" (namely, you can't do anything with the 1st, and you can strip the 2nd only if there is no equity securing it, other than that, you cannot do anything to primary residence mortgages).

                            However, there is no such restriction on investment properties (i.e. rentals, flips, etc). Note, the original loan on these second properties must specifically state that the home was not to be a primary residence. Thus, you can modify and strip mortgages on investments properties. Although that sounds good, it is really not all its cracked up to be, because any action you take on these mortgages, must be fully complete within the 60 months of the chapter 13 plan. For example, if you have a rental property that is worth $150K but you owe $200K, you "can" cram down that mortgage, but the CATCH is, you must pay the cramed down amount ($150K) within the chapter 13 plan, i.e. within 60 months. And no, you cannot modify interest rate.

                            Comment


                            • #15
                              So if I understand correctly,

                              If a property was initially a primary residence, then converted to a rental a few years later, the stripping would "NOT" be an option because the original loans were for primary residence purposes.

                              Comment

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