unsecured debt & lien strip?

[duumy]

Hello,

We have over $180k in unsecured credit card debt, we also have a HELOC on our home for $255k and our house has an appraised value less than the first mortgage, we want to lien strip the HELOC 2nd in ch13. However is my HELOC 2nd considered unsecured debt? My understanding is that the write-offable amount of unsecured debt limit in California for ch 13 is ~$360k for unsecured debt? Is the 2nd HELOC considered unsecured debt or since at loan origination it was considered secured debt it is treated different? Or am I over the debt limit and out of luck? How does that work then if you are over the unsecured debt limit, what does a person do?

Thank You!
duumy

[despritfreya]

Under the In re Smith decision the 2nd will be added to your unsecured amount and if you are above $360,000 or so you will not be able to do a 13. Don't even mess with it. If you want to do the strip off do a Chapter 11. Better yet, let the home go.

Des.

[Ontovicks]

Don't know whether this is relevant but recently the Fourth Circuit Joins Majority of Circuits in Allowing Strip Off of Unsecured Lien In Chapter 13. This was reported today in National Association of Consumer Bankruptcy Attorneys News.

[duumy]

Thank you for your responses, I saw a post about about lien stripping in this forum if you do a google on "bankruptcy in california over $360000 in unsecured debt" I am unable to post links yet so thats the best I could do at this point. We would like to keep the home, emotion aside, we know we wont be able to get a comparible down the road, (for big brother paranoid reasons I dont want to explain) but we are prepared to walk if need be, I think its best to ask an experienced bk attorney? This is confusing, regardless thank you for your responses.

[HHM]

Hello,

We have over $180k in unsecured credit card debt, we also have a HELOC on our home for $255k and our house has an appraised value less than the first mortgage, we want to lien strip the HELOC 2nd in ch13. However is my HELOC 2nd considered unsecured debt? My understanding is that the write-offable amount of unsecured debt limit in California for ch 13 is ~$360k for unsecured debt? Is the 2nd HELOC considered unsecured debt or since at loan origination it was considered secured debt it is treated different? Or am I over the debt limit and out of luck? How does that work then if you are over the unsecured debt limit, what does a person do?

Thank You!
duumy

Yes, the HELOC will be considered unsecured debt for Section 109 debt limit issues.

[duumy]

darn! going forward would you suggest ch7? and if we "really" want to stay try and negotiate a buyout on the 2nd? Our 2nd is with BofA and my understanding is to not re-affirm, I see that folks have been able to negotiate buyouts on 2nds, anyone have experience with buyout percentages? (family would help us with 2nd buyout) we dont have the cash laying around, we are 100% not trying to fool anyone.

[HHM]

If you can do a 7, do the 7. However, with that size of a 2nd mortgage, it is unknown what percentage they will accept, the average is 5-15%, but with that amount of debt, maybe you can do better than 5%, maybe not.

It doesn't sound like you have a choice anyway. Definitely don't get talked into a chapter 11, not worth the cost.

[despritfreya]

This is confusing.

Not confusing. Until July of 2010 this issue was "up in the air" in the 9th Cir. The BAP ruled upon it (In re Smith) and sided with the majority. The amount is added to your unsecured debt and you will not be able to file a 13. There is nothing wrong with a Chapter 11. My Firm routinely files them due to this issue if the client is determined to try to keep the home.

Des.

[despritfreya]

going forward would you suggest ch7? and if we "really" want to stay try and negotiate a buyout on the 2nd?

If you qualify for a 7 and understand that the 2nd simply does not have to negotiate then, yes. Understand, however, that if the 2nd does not negotiate, at some point it can foreclose (stupid) or, if and when you try to sell, you will have to pay the lien either in full or under a "short sale" (which is also stupid).

Des.

[duumy]

Thank you for clearing this up, it sounds like I need to talk with my attorney and get 7 going we have been holding out on filing 7 to try and get the lien strip in 13, no use now. I like my attorney we interviewed several, but I dont think he knew about this? Makes me a little worried...

I have been reading here for about a year now and the information in this forum is awesome, thank you!

[despritfreya]

Definitely don't get talked into a chapter 11, not with the cost.

Sorry, HHM, but a well run Chapter 11 is no more expensive than a Chapter 13. Legal fees are higher but the Trustee's fee is not an issue.

Add to that the flexibility of how one formulates a Plan. . .

- payments do not start until the Plan is Confirmed; the length can be what ever you want it to be so long as you pay what is required to be paid; and, unless there is an 1129(a)(15) issue there is no "commitment period" - And even if there is an (a)(15) issue you can do an early buyout based upon overall Plan funding -

and the Chapter 11 can be a good thing.

My Firm can handle a basic 11 (a 13 on steroids) for between $6 and $8k. It just depends on how efficient one is.

Des.

[HHM]

I understand desp (chap 11 IS an option in this scenario)...no offense to the OP, but most people in these circumstances end up losing the house anyway and the house isn't really worth saving. But your are correct, if the issues in the case are fairly simple, a streamlined chapter 11 can get the lien strip done when the only thing barring a chapter 13 is debt limit issue. However, it sounds like this debtor may qualify for a 7, in which case, it can be a real uphill battle against a UST to get a chapter 11 confirmed, the UST (at least here) don't like to see chap 11's used as closet 7's to strip a lien.

Better to be DEBT FREE than save a house that is going to decrease in value another 10-20% over the next 2 years. The reality check is that ANY cost put toward saving the house is a VERY POOR INVESTMENT.

[duumy]

non taken. I appreciate the options, but think at this point 7 is probably best for my situation. I dont know much about ch 11 and will do some research on it, debt % payback is first question, if we have to pay 100% back then absolutely not worth looking at.

[HHM]

non taken. I appreciate the options, but think at this point 7 is probably best for my situation. I dont know much about ch 11 and will do some research on it, debt % payback is first question, if we have to pay 100% back then absolutely not worth looking at.

You won't have to pay 100% back. Conceptually, think of chapter 11 like a chapter 13. Your payback is determined by your disposable income, if any. With chapter 11's, there are just more hoops to jump thru and the "details" of how things work are a little different and more people have a say on whether your plan gets confirmed.

Here is a simple way to analyze it.

Is your primary mortgage payment 20% or less than your gross monthly income. If no, is it less than 25%. If no, dump the house.
If yes, then it might be worth exploring a chapter 11. But then, only do chapter 11 if your 1st mortgage payment + the chapter 11 plan payment would be less than 25% of your gross monthly income.
If mortgage payment is 20%-25% of gross monthly income, will your mortgage payment + chap 11 plan payment be less than 30% of gross monthly income. That is the absolute cap and is risky, Anything above that cap, the plan is pretty much doomed to fail.

[duumy]

Actually we are in the number limit that you put forth, its just the "more people having a say" issue, for example I owe $60k to citibank unsecured and I dont have the DMI to pay them anything, are they going to object? probably, then what? That is a bit of what I am trying to figure out. I have numerous CC's with that smae issue...