2nd Mortgage - Unsecured Claim?

[BrokeinCA]

Hi all. Hope you can help. I have a call in to my attorneys office, but am hoping someone here can answer my question in case I don't hear back soon. I was reviewing the list of claims filed on Pacer and my second mortgage is listed as unsecured. We are in a 100% payback plan and did not include them in the payment amount. If we have to pay them back, our monthly payment will increase significantly. Has anyone heard of this? We are letting our house go in the BK, but there has not been any action taken to forclose. Am I worrying for nothing or do they potentialy have a claim? The last date for creditors to file a claim in my case is March 9th.

Thanks in advance for help!

[SMinGA]

If the 1st mortgage is higher than what the house is now worth, then it seems correct that the 2nd is unsecured.

[BrokeinCA]

So does that mean that we are going to have to pay the full amount of our 2nd through the chapter 13 even though we are surrendering the house?

[SMinGA]

Would depend on what your payment is, how many file claims, etc. You may ultimately not be in a '100% payback' plan depending on those #s.

[BrokeinCA]

Oh no.... Now I am really worried. Originally our lawyer told us that if we surrendered our house in BK we would not be responsible for either mortgage since they are secured by the house. I am so confused.

[justbroke]

Don't be confused. This is how it works. In a Chapter 13, you pay your secured debts based on your Plan. The Chapter 13 allows you to cure any past due payments and keep the property. Any extra money you have, the disposable monthly income (DMI), is split, pro rata, between the unsecured creditors who file an allowed claim. This DMI is calculated via a formula known as the Means Test.

Now, if you surrender your home or cars in a Chapter 13, the creditor is allowed to file an "unsecured claim" for the deficiency balance created from the foreclosure or repossession and sale. Since you only commit your DMI to the Chapter 13, it is more than likely that you would never pay off the unsecured creditors, but you would pay them back some "percentage".

Since you are in California, if you never refinanced your home, then you have what is known as a non-recourse loan. That means the creditor can not claim a deficiency, and would not be allowed to file an unsecured claim. If you see a claim listed as unsecured and it's your second mortgage, it could be because your second mortgage was not used to purchase your home, and was obtained after you purchased the home.

The bottom line is, your DMI will not increase, even if the unsecured claim of the 2nd mortgage being allowed.

[BrokeinCA]

Thanks Justbroke. I am confused because my home has not been forclosed on/sold, but the 2nd mortgage is filing an unsecured claim. We are currently in a 100% plan with a monthly payment to the trustee of $2510 per month. Our DMI is $3000 according to our attorney (although I don't know how that is possible as our current payment is a struggle). Anyway, it sounds like there is a possibility that our payment will increase $500 a month. This has me very worried.

Our attorney had originally told us that if we surrendered the home that we would not be responsible for the 1st or 2nd mortgage. When we went to sign papers he mentioned that the only way we would be responsible for the second is if they had a deficiency judgment against us before the deadline for creditors to file claims. Obviously this was a concern for us and a drastic change from what we were originally told. Seems the story keeps changing. We were struggling to pay our second mortgage and that is the reason we let our house go. Now it looks like we may have to pay the second anyway. This makes me very sad. Sorry to be rambling I'm just very stressed by the whole thing.

[justbroke]

I understand your frustration. Perhaps your lawyer can sit down with you and explain the whole thing and where you go from here. If your DMI is actually $3,000 a month and that was after you surrendered your home, then you may be required to pay that. There are too many issues for me to jump in, because it's California, they do have non-recourse loans there, and I don't know the affect of any of that on your case.

[BIGSTAR1]

Don't be confused. This is how it works. In a Chapter 13, you pay your secured debts based on your Plan. The Chapter 13 allows you to cure any past due payments and keep the property. Any extra money you have, the disposable monthly income (DMI), is split, pro rata, between the unsecured creditors who file an allowed claim. This DMI is calculated via a formula known as the Means Test.

Now, if you surrender your home or cars in a Chapter 13, the creditor is allowed to file an "unsecured claim" for the deficiency balance created from the foreclosure or repossession and sale. Since you only commit your DMI to the Chapter 13, it is more than likely that you would never pay off the unsecured creditors, but you would pay them back some "percentage".

Since you are in California, if you never refinanced your home, then you have what is known as a non-recourse loan. That means the creditor can not claim a deficiency, and would not be allowed to file an unsecured claim. If you see a claim listed as unsecured and it's your second mortgage, it could be because your second mortgage was not used to purchase your home, and was obtained after you purchased the home.

The bottom line is, your DMI will not increase, even if the unsecured claim of the 2nd mortgage being allowed.

Justbroke - I am in a similar situation - I posted a separate thread about bumping up against the unsecured limit (I know you are very knowledgeable about this). What is pushing me there is 97K in a second. The second was a purchase loan made in California, for which I have not refinanced. You seem to be saying that this second as it is non-recourse which may not contribute to my unsecured limit in a 13- I am NOT keeping the house.

Alternatively could not I just not reaffirm the house and let it go into foreclosure, and since they can't come after for me for a deficiency anyway would not this have the same effect ? I am not worried about my DMI here , just how this impact how close i am to unsecured limit.

[justbroke]

Alternatively could not I just not reaffirm the house and let it go into foreclosure, and since they can't come after for me for a deficiency anyway would not this have the same effect ?

I don't know what I'm saying about non-recourse purchase money loans in California, because I'm not familiar with how they are treated in Bankruptcy. I too was pushing up against the debt limit in my Chapter 13. Actually, I was over the limit if you counted my wholly unsecured 2nd mortgage in with my general unsecured creditors. However, my lender filed it as a secured debt, so we never went through this.

Also, some courts require that if you're going to lien strip the 2nd, that you count that as unsecured debt. So, this can differ based on which District you are in as well. As I wrote, I was lucky in that mine went in as secured claim and it didn't affect me. Some have move past this problem by marking the second as unsecured, but also checking that "contingent" and "unliquidated" since a hearing is required to determine the value and the extent of the lien. Only non-contingent, liquidated and undisputed items count in the limit (11 USC 109(e)).

Besides, Congress needs to do something, because many Californians (Inland Empire and even SFO area) are suffering from the relatively low debt limits in Chapter 13.

[NoTomatoCan]

As Justbroke points out, this does vary by district. For my filing, I have to count the $160k that my home is underwater as unsecured debt. It made no difference if I was going to attempt a lien strip or not. In fact, we had to do that for any unsecured portion of our secured debt... Our 2008 SUV had a blue book value about $3k lower than what we owe on it. That is another $3k in unsecured debt!

It is amazing how quickly you can approach the unsecured debt limit with CCs, unsecured home loans, and student loans!

[BIGSTAR1]

I have posed my question to my attorney for review.

sort of off topic, but since I am on a razor thin margin for unsecured I am also looking at filing some of my accounts as secured

Specifically:

Sears: 1K (I think this has a PMSI clause and this one seems like I can get by with secured)
Dell: 2K (checking)
Home Depot: 2.7K (fridge for 1.2K)

Getting these as secured helps me go under the unsecured bar with room to spare. Does this seem like a good strategy - will run it by my attorney, but seems like filing as secured for these 3 is doable. I also have 9K in Best Buy I could file as secured. I did a search on secured for these cards and seems like a mixed bag. as to whether I can list as secured.

[justbroke]

All three of those are secured creditors. Best Buy is secured as well. They may file as unsecured, but they are secured because you grant a consensual PMSI on everything you buy.