Is this a lien strip equivalent in Ch7?

[pcn]

We talked with a lawyer yesterday and he suggested an alternative to ch13 and the lien strip. We qualify for ch 7, but were thinking ch13 to get the benefit of a lien strip. He suggested to go ch7 and both 1st and 2nd mortgages would be eliminated. We would either would or wouldn't reaffirm the first, but do nothing on the second. He said that reaffirming neither gives us the ability to walk away in the future should job/economy require that. The 13 w/lien strip would lock us back in, and his alternative would give us more flexibility, plus be 4+ years faster to be done with the same outcome. We are in AL if that makes a difference. What do you all think about that? What's the negative of his alternative? If we reaffirmed the 1st we would get the same outcome as the ch13+LS, right? except instead of paying the 2nd as unsecured in the ch13, we would end up negotiating later with the 2nd to remove them if we wanted to refinance or sell later. It sounds reasonable but we are confused. Help!

[HHM]

we would end up negotiating later with the 2nd to remove them if we wanted to refinance or sell later.

That is the BIG CATCH.

Keep in mind, your lawyer is wanting you to accept the "risk" of not paying the second. The 2nd has just as much the right to foreclose as the 1st mortgage when you don't pay (even after a chapter 7). If you file chapter 7, the security interest (i.e. the lien) of BOTH the 1st and 2nd survive, you merely discharge your personal responsibility to pay the debt (i.e. you are not liable for any deficiency in the future). However, the lien survives and if you fail to pay the mortgages, they can foreclose. At least with a chapter 13, you are guaranteed to actually remove the lien.

I don't like the idea of the "supposed" chapter 7 lien strip plan because it creates too much uncertainty. Also, the 2nd mortgage is going to be paid something in both scenarios, in a chapter 13, their debt becomes unsecured and will receive some percentage. If you file chapter 7, and in the future go to sell your house, they will demand something (probably full payment) to release the lien. I think you are over estimating the value of your bargaining position in the future; also, you are under a foreclosure risk. A junk debt buyer could simply snap up the 2nd mortgage and initiate foreclosure simply as a collection tactic.

If you qualify for a 13 lien strip, striping that second will be a benefit to you, and you would have a better than average shot at completing a chapter 13, the chapter 13 is the better option.

[pcn]

Thanks for the reply. The impression I had from our lawyer was that the second had to be able to have something to attach to in order to do anything, and that to foreclose the first mortgage had to be out of the way first. So in a ch 7 with 1st and 2nd motgages do most people reaffirm both? I thought I had read of people reaffirming neither, but maybe that was only in the case where they were just trying to live free in the house fr as long as they could. We are trying to find the best way to keep the house. The 1st is 86k, the 2nd is 40k, and the house current value is 80-85. The lien strip in 13 sounded better, but the length of time of the 7 sounded much better. Thanks again for the help!

[justbroke]

Thanks for the reply. The impression I had from our lawyer was that the second had to be able to have something to attach to in order to do anything, and that to foreclose the first mortgage had to be out of the way first. So in a ch 7 with 1st and 2nd motgages do most people reaffirm both?

A junior position lienholder (2nd mortgage, third mortgage), absolutely does not have to have any value secured by the present value of the property, to exercise their right to foreclose! Technically, a junior lienholder could foreclose, pay off the first lienholder, and sit on the property until it improved in value. They could do this if they had less than $1, or only $1 in value. What you're betting on is that they won't do this. However, it's a gamble.

I thought I had read of people reaffirming neither, but maybe that was only in the case where they were just trying to live free in the house fr as long as they could. We are trying to find the best way to keep the house. The 1st is 86k, the 2nd is 40k, and the house current value is 80-85. The lien strip in 13 sounded better, but the length of time of the 7 sounded much better. Thanks again for the help!

The best way to keep any property, is to file a Chapter 13. I think many lawyers will agree that the best way to keep property in a Bankruptcy, is a Chapter 13, if you can complete the plan and live in that budget. The lien stripping tool is of tremendous benefit. (I've stripped about $130K second mortgage.)

Taking the risk of a junior lienholder not foreclosing, is just not a sound model if you really want to keep a property. What if the property increases in value in the next 2 years? That's likely, but not probable. How about 3-4 years? You are at the mercy of the junior lienholder in this situation. And, as HHM writes, the junior lienholder could just foreclose in spite.

[pcn]

The "for spite" option might have something to it, since BankAm owns the 2nd, plus 17k of cc debt that they would loose. Putting our trust in them dealing in the future worries me, but the atty seemed so convinced that was the better option. And he makes more if we go 13 so it didn't seem like he would have more of a benefit to steer us to the ch7. As a related question - do people know before hand which chapter is better for them, or do they rely on the knowledge of the atty? He almost had me convinced but the responses against it here are very convincing, and really back up the slight reservations I had after talking to him. Making them large reservations. And helping to click the stress level up a couple notches...

[banca rotta]

I normally don't like telling someone to wait to see what the politicians will do but as part of the stimulus package to possibly be signed in 48 hours from now maybe they will attach a sensible amendment to the bk code allowing the cram downs of mortgages.

We discussed this on many other threads and in it's proposed version it didn't look like it would help much. See what happens by the end of next week if they did anything that makes sense for you. ;)

[HHM]

I normally don't like telling someone to wait to see what the politicians will do but as part of the stimulus package to possibly be signed in 48 hours from now maybe they will attach a sensible amendment to the bk code allowing the cram downs of mortgages.

We discussed this on many other threads and in it's proposed version it didn't look like it would help much. See what happens by the end of next week if they did anything that makes sense for you. ;)

True enough, but most of the legislation will be retroactive for 2009, so I think it is a low risk for someone to move now to help their situation. Ultimately, you can only take action based on the information at hand. I have seen too many people devastate themselves with "what if" scenarios.