Why reaffirming a mortgage is a very, very bad idea.

[IBroke]

I guess the question I'd have is, how can you afford a $560K mortgage on $30K annual income under any circumstances?
What percent of yoir income is going to housing? I'd think long and hard about this. Nothing will ruin a fresh start like trying to hang on to something you can't afford.

Well, my grandmother is helping out once in a while. Although the mortgage-balance is $560K, the monthly payment is just $1,300 - and that's what counts. Renting certainly isn't for free. Even a house half the size of our current home is going to cost us more when renting - so where's the sense in that? And when the mortgage is discharged in a CH 7, the personal liability on the $560K is gone as well.

[IBroke]

3. You DO NOT have to wait 4 years from the 7 discharge to file a 13. You only need to wait if you are wanting a discharge to be entered in the 13. Since you are not asking for a discharge and are seeking to strip the lien that survived the 7, you can file the 13 once you have the 7 discharge. The question will be whether or not the 13 was filed in "bad faith".

Practice pointer: You could try the strip in the 7. While there is no published authority to do this, if you file the 506 complaint, properly serve it and the lender fails to answer, you maybe able to get your judge to enter a default judgment. I did this once and was successful as the lender failed to file an answer. Had the lender filed an answer my client would have decided if she wanted to be a “test case”. If the answer was “no” we would have dismissed the adversary, filed her 13 (she had her 7 discharge) and filed a new adversary to do the strip.

Des.

Des,

Thank You very much for your reply! Nr. 3 is VERY interesting! That option almost sounds like the old "CH 20" where I thought it wouldn't be an option any more since 2005. Let's say my mother files CH 7 and tries to settle the second. They don't want to settle and everything stays "as is", meaning the debt on the second is discharged but the lien is still there. Any time after the CH 7 discharge (6 months, 2 years, 5 years, who knows?), the second decides to start a foreclosure-process (although it doesn't make any economical sense).

If my mother would THEN (and only then) file a CH 13 just to save our home and to strip the second, would that be considered "bad faith" as well although it would be the only way to save the house?

Thanks in advance!

[AbbeyA]

Well, the answer is simple: Renting is not an option because we can't afford it. Our first mortgage was reduced from $3,900/month to $1,300/month (and that's PITI). Moving itself would cost us $10K and there is no 3,800 sqft.-home on the market for less.

Our goal is to get rid of the second mortgage - not of the house where we invested a lot of money in. Keeping an underwater property often doesn't make much sense - but with a monthly payment that is about half of the rent of a comparable property - it certainly does - even economically. Times are gone where you can simply buy a house with $0 down. So IF we would get approved for a decent home after 3 years, what do you think would be required as a downpayment? $30K? Where would that money come from if we would have to pay $1000/month more in rent over the next 3 years and pay for 2 moving-expenses? And how high would that monthly payment be? Less than $1,300 PITI? I don't think that's an option with an annual income of about $30K.

As you can see, the idea of just walking away from that home might not be as good as it first appears. The only question is CH 7 or CH 13.

OK, but what happens in 5 or 10 years when you want to sell this house b/c you get a job transfer or something comes up where you have to move? Now you're stuck with the same 560k mortgage, which you will not have paid down at all b/c the payment is only 1300 a month. The house will not appreciate in value any time soon, and definitely not to what it was worth a few years ago (just my opinion). So you will then have to sell the house for around 300k and will be on the hook for $260k if you reaffirm. Why not let it foreclose, save the money, hope it takes 3 years and then move forward with your true fresh start? Also, what happens if you lose your income and can't afford the 1300? Does your mother contribute any income to the mortgage payment? What happens if she is unable to contribute?

Think it through very carefully and decide what your really need to do in order to turn your circumstances around.

[IBroke]

OK, but what happens in 5 or 10 years when you want to sell this house b/c you get a job transfer or something comes up where you have to move? Now you're stuck with the same 560k mortgage, which you will not have paid down at all b/c the payment is only 1300 a month. The house will not appreciate in value any time soon, and definitely not to what it was worth a few years ago (just my opinion). So you will then have to sell the house for around 300k and will be on the hook for $260k if you reaffirm.

Who is talking about reaffirming?

Why not let it foreclose, save the money..

Sorry when I'm so persistant on that one - but what do you mean by "save the money"? What money? I have to repeat myself in pointing out that renting isn't free and probably costs more money than what we are currently paying.

hope it takes 3 years and then move forward with your true fresh start? Also, what happens if you lose your income and can't afford the 1300? Does your mother contribute any income to the mortgage payment? What happens if she is unable to contribute?
Think it through very carefully and decide what your really need to do in order to turn your circumstances around.

The $1,300 are always going to be available. The great thing is that the P&I-portion of this loan ($515/month) is fixed for 27 years - although it's a HAMP. Inflation is only going to make this an even better deal in the long run.
Although I'm currently unemployed - this certainly won't stay that way. My mother is the homeowner.

In case everything goes wrong and we would have to move somewhere else, we can still let the house go. By then, the personal liability for the $560K will be discharged for sure. So why on earth should we give up our own home and be a slave to another landlord and probably pay more for a smaller home? I'd rather rent my own place...and after all, that's probably what the majority of homeowners with a mortgage are doing right now. With the right "bang for the buck", there is absolutely nothing wrong with that.

[despritfreya]

In response to:

"If my mother would THEN (and only then) file a CH 13 just to save our home and to strip the second, would that be considered "bad faith" as well although it would be the only way to save the house?"

The bad faith issue is what weighs on my mind. If there are no other creditors we have nothing more than a 2 party dispute which is disfavored by the bk courts. I have yet to handled such an issue. Remember, I was able to default the strip down in the 7 so no need to file the 13 which, if filed, would not have contained any other creditors.

But. . .

I am dealing with 2 cases right now that are your old fashioned "Chapter 20". In both cases the client will get the added benefit of striping the 2nd. In both cases we needed to discharge tons of debt and then come back to do the 13 to "cure" arrears owed to the 1st and pay taxes. In one of the two cases the debtor, during the gap, had incurred other debt (credit cards) which the Plan states will be paid in full hence no need for a discharge. In both of these cases the debtors had a real need for the 2nd filing but no need for a "discharge". No one can argue that the filings were in bad faith.

Des.

[IBroke]

But. . .

I am dealing with 2 cases right now that are your old fashioned "Chapter 20". In both cases the client will get the added benefit of striping the 2nd. In both cases we needed to discharge tons of debt and then come back to do the 13 to "cure" arrears owed to the 1st and pay taxes. In one of the two cases the debtor, during the gap, had incurred other debt (credit cards) which the Plan states will be paid in full hence no need for a discharge. In both of these cases the debtors had a real need for the 2nd filing but no need for a "discharge". No one can argue that the filings were in bad faith.

Des.

That's very interesting! So let's say my mother gets a few small CCs (let's say with CLs between $300 and $500) after here discharge - you know, those offers that fly in once you are discharged..And what if I would lend her money and be a "creditor"?

She makes the minimum payments on time but carries a debt on them. If she would file then and pay them in full, would that make the case more "solid"? And since you stated there would be no need for a discharge, am I right in the assumption that this process won't take 3 or 5 years?

[backtoschool]

Who is talking about reaffirming?



Sorry when I'm so persistant on that one - but what do you mean by "save the money"? What money? I have to repeat myself in pointing out that renting isn't free and probably costs more money than what we are currently paying.



The $1,300 are always going to be available. The great thing is that the P&I-portion of this loan ($515/month) is fixed for 27 years - although it's a HAMP. Inflation is only going to make this an even better deal in the long run.
Although I'm currently unemployed - this certainly won't stay that way. My mother is the homeowner.

In case everything goes wrong and we would have to move somewhere else, we can still let the house go. By then, the personal liability for the $560K will be discharged for sure. So why on earth should we give up our own home and be a slave to another landlord and probably pay more for a smaller home? I'd rather rent my own place...and after all, that's probably what the majority of homeowners with a mortgage are doing right now. With the right "bang for the buck", there is absolutely nothing wrong with that.

If you like the house and neighborhood you are living in, I see no issue with what you are doing. I think it will be difficult to strip the second in a chap 13 however. You will not be in a position to accrue enough extra debt to make the case believable, and debt to a family member will be looked at as a huge red flag. If your household income is 30k and you have housing debt over 500k, and a bankruptcy in the family (yours) it is not likely anyone is going to lend you a significant enough amount of money to make a chapter 13 feasible.

[IBroke]

If you like the house and neighborhood you are living in, I see no issue with what you are doing. I think it will be difficult to strip the second in a chap 13 however. You will not be in a position to accrue enough extra debt to make the case believable, and debt to a family member will be looked at as a huge red flag. If your household income is 30k and you have housing debt over 500k, and a bankruptcy in the family (yours) it is not likely anyone is going to lend you a significant enough amount of money to make a chapter 13 feasible.

Hi b2s,

So I guess this will be indeed more difficult than I thought. What about filing CH 13 right from the start? I know that in my district, even current mortgages will be handled by the trustee - which will cost us about $100/month in fees. Looking at the income and the fact that the assets would be below the exemptions in a CH 7, I guess the other unsecured creditors wouldn't get much. My mother would wait with the filing until our joint auto-loan is paid off - so there won't be any payments for the car either.

Could they claim my mother wouldn't make enough money to file CH 13 if basically all she would have to pay is the mortgage (plus trustee-fee on that) although we can show that we paid that amount on time for more than a year? We could come up with the attorney-fee in advance as well so that shouldn't increase the monthly payment either.

I'm assuming my mother could be discharged in 3 instead of 5 years so the trustee-fee for the mortgage would be $3600. Adding the attorney-fee, we might be at the minimum amount required to settle the second - so I guess that would work as well? After all, that would ensure that the second would be gone - a CH7 and settlement-approach might be a gamble..

[despritfreya]

That's very interesting! So let's say my mother gets a few small CCs (let's say with CLs between $300 and $500) after here discharge - you know, those offers that fly in once you are discharged..And what if I would lend her money and be a "creditor"?

She makes the minimum payments on time but carries a debt on them. If she would file then and pay them in full, would that make the case more "solid"? And since you stated there would be no need for a discharge, am I right in the assumption that this process won't take 3 or 5 years?

Again, it all goes to motive. In your scenario there still could be bad faith. While I am looking at this from the creditor's point of view, an aggressive debtor's attorney will argue that there is nothing wrong with using the provisions of the Code to their fullest. As to the length of the Plan if you are below median the Plan is 3 years if above it is 5 years but in either case the Plan ends (no discharge) when all "allowed claims" are paid in full, which, theoretically could be almost immediately upon Confirmation. Definitely a very grey area.

Des.

[AbbeyA]

Who is talking about reaffirming?



Sorry when I'm so persistant on that one - but what do you mean by "save the money"? What money? I have to repeat myself in pointing out that renting isn't free and probably costs more money than what we are currently paying.



The $1,300 are always going to be available. The great thing is that the P&I-portion of this loan ($515/month) is fixed for 27 years - although it's a HAMP. Inflation is only going to make this an even better deal in the long run.
Although I'm currently unemployed - this certainly won't stay that way. My mother is the homeowner.

In case everything goes wrong and we would have to move somewhere else, we can still let the house go. By then, the personal liability for the $560K will be discharged for sure. So why on earth should we give up our own home and be a slave to another landlord and probably pay more for a smaller home? I'd rather rent my own place...and after all, that's probably what the majority of homeowners with a mortgage are doing right now. With the right "bang for the buck", there is absolutely nothing wrong with that.

Ok, I misunderstood. I thought you were going to discharge the second mortgage but reaffirm the first. That's where I couldn't understand it. Now I agree with you, with a payment of $1300 a month, it absolutely does make sense to hang onto the home right now. My mistake, I would stay too in that case for $1300 a month.

[IBroke]

Again, it all goes to motive. In your scenario there still could be bad faith. While I am looking at this from the creditor's point of view, an aggressive debtor's attorney will argue that there is nothing wrong with using the provisions of the Code to their fullest. As to the length of the Plan if you are below median the Plan is 3 years if above it is 5 years but in either case the Plan ends (no discharge) when all "allowed claims" are paid in full, which, theoretically could be almost immediately upon Confirmation. Definitely a very grey area.

Des.

Yeah, looks quite difficult. Considering that filing a CH 7 PLUS a CH 13 is also associated with some high attorney-fees, it might not be worth it. A clear cut CH 13 right from the start might be the better way to go - also in regards to the credit-history. Two BKs don't look too good either..

Now, I just want to make sure that the unsecured debt-limit won't be an issue in my mother's case. As far as I know, The second mortgage - although stripped - is not applied towards the unsecured debt limit because the transformation from secured to unsecured debt is contingent. Is that still accurate?

[IBroke]

Ok, I misunderstood. I thought you were going to discharge the second mortgage but reaffirm the first. That's where I couldn't understand it. Now I agree with you, with a payment of $1300 a month, it absolutely does make sense to hang onto the home right now. My mistake, I would stay too in that case for $1300 a month.

No problem!

I have to admit that the whopping $560K look very scary at first..

[despritfreya]

In response to:

"Now, I just want to make sure that the unsecured debt-limit won't be an issue in my mother's case. As far as I know, The second mortgage - although stripped - is not applied towards the unsecured debt limit because the transformation from secured to unsecured debt is contingent. Is that still accurate? "

Not in the 9th Circuit. Very recent decision of In re Smith (decided on July 8th by the BAP and "ordered" published) stupidly applies In re Scovis 249 F.3d 975 (9th Cir. 1999) to the lien strip issue and holds that the unsecured claim is counted towards the 109 debt limits, despite the fact that a) you must file an adversary and b) the lien strip only goes into effect after you complete the 13 and get a discharge. My boss is considering taking this issue up to the 9th Cir. when the "right" case comes along. We all believe the Smith decision is wrong.

Des.

[IBroke]

In response to:

"Now, I just want to make sure that the unsecured debt-limit won't be an issue in my mother's case. As far as I know, The second mortgage - although stripped - is not applied towards the unsecured debt limit because the transformation from secured to unsecured debt is contingent. Is that still accurate? "

Not in the 9th Circuit. Very recent decision of In re Smith (decided on July 8th by the BAP and "ordered" published) stupidly applies In re Scovis 249 F.3d 975 (9th Cir. 1999) to the lien strip issue and holds that the unsecured claim is counted towards the 109 debt limits, despite the fact that a) you must file an adversary and b) the lien strip only goes into effect after you complete the 13 and get a discharge. My boss is considering taking this issue up to the 9th Cir. when the "right" case comes along. We all believe the Smith decision is wrong.

Des.

Sorry when this seems to be a dumb question - but I'm not too familiar with the court-system. So does this decision have a direct influence to CH 13 filings in the Florida Middle District?

If so, CH 13 would be off the table right from the start...

[despritfreya]

Sorry when this seems to be a dumb question - but I'm not too familiar with the court-system. So does this decision have a direct influence to CH 13 filings in the Florida Middle District? If so, CH 13 would be off the table right from the start...

No, the 9th Cir. BAP decision is not binding in Florida which is, I believe, in the 12th Circuit - not sure. . .) but it could influence a court in your district.

The Bankruptcy Appellate Panel (BAP) is the 1st level of appeal - decisions out of it are binding on the bk courts within the circuit until the Court of Appeals for that circuit renders a ruling changing it.

Des.