2nd and Collections after a BK 7

[frankies_mom]

Hi all,

I have been able to get some info on these boards already with similar situations. But I still have a few questions if anyone has any advice/info they can share.

I went through a Ch 7 two years ago in which I was able to keep my home and everything went smoothly.

I have a 2nd mortgage that was held through Citimortgage. I filed a hardship about 3 months ago due to work/income reasons and they are supposedly offering all of these programs to help people. About 6 weeks ago I get a letter from an insurance company saying they paid the mortgage in full. I was confused so I called Citi.... they say according to them my 2nd mortgage is paid in full, account closed, and off their books. I guess charged off? So then, about 2 weeks after receving this letter from this insurance agency, I get a letter from a DCS collection service saying this is now in collections with them.

I called DCS to see if I can set up something with them. They offered me 4 impossible options to settle my account and then came back and said if I could offer them something they would consider it. It sounded like I was at a used car dealership. I am just wondering if it illegal for them to collect on this since I went through a Ch 7 and did not reaffirm either 1st or 2nd mortgage? According to Citimortgage, they are satisfied and I am current on my 1st through Wells Fargo. We are also upside down and no equity as well.

If anyone has any advice or knows what I should do please help! Thank you!

[justbroke]

If you did a "ride-through", which it sounds like, and didn't reaffirm the mortgage, then they cannot collect! You should stop "negotiating" with the Junk Debt Buyer (JDB) and immediately send them (via FAX and certified mail return receipt) a copy of your Discharge and Injunction!

Nothing prevents them from prodding you to get you to pay, but they can't threaten to sue or otherwise prosecute you. If you're there trying to negotiate with them, then they probably are all excited because they may be able to get something from you, on an unenforceable debt!

[frankies_mom]

Thanks for your input! That is what I am thinking and hoping but then I am wondering if this is too good to be true. And no, I did not reaffirm. Do you know if they can put a lien on our house? I would like to just stay in it (current on the 1st). But when it comes time that we can sell eventually I don't want to be surprised by something waiting in the wings. What do you think?

[justbroke]

Thanks for your input! That is what I am thinking and hoping but then I am wondering if this is too good to be true. And no, I did not reaffirm. Do you know if they can put a lien on our house? I would like to just stay in it (current on the 1st). But when it comes time that we can sell eventually I don't want to be surprised by something waiting in the wings. What do you think?

There is already a lien on your home from the previous lender (who sold the debt). That lien is transferred to the new creditor (Junk Debt Buyer). The JDB will attempt to enforce that lien. They can do this by foreclosing. If the JDB attempted to foreclose, I would see an attorney and you should probably be able to quash that foreclosure action. The reason is that it's usually difficult for a JDB to show that they indeed own the lien and that they have a right to foreclose. (In some States, like California, it's near impossible for a JDB to foreclose!) They can't just add a new lien to the home because that would certainly be illegal (because they don't have an enforceable debt!). If they did put a lien, you'd go back to your lawyer and file a Motion to Re-Open and Order to Show Cause and for Sanctions. That (filing a lien) would be a violation of the Discharge Injunction and cause for Sanctions!

When you go to sell it, however, they may be able to collect then. Again, whether their "lien" is enforceable when it's sold, is what allows them to collect when it's sold.

[albacore44]

There is already a lien on your home from the previous lender (who sold the debt). That lien is transferred to the new creditor (Junk Debt Buyer). The JDB will attempt to enforce that lien. They can do this by foreclosing. If the JDB attempted to foreclose, I would see an attorney and you should probably be able to quash that foreclosure action. The reason is that it's usually difficult for a JDB to show that they indeed own the lien and that they have a right to foreclose. (In some States, like California, it's near impossible for a JDB to foreclose!) They can't just add a new lien to the home because that would certainly be illegal (because they don't have an enforceable debt!). If they did put a lien, you'd go back to your lawyer and file a Motion to Re-Open and Order to Show Cause and for Sanctions. That (filing a lien) would be a violation of the Discharge Injunction and cause for Sanctions!

When you go to sell it, however, they may be able to collect then. Again, whether their "lien" is enforceable when it's sold, is what allows them to collect when it's sold.

Man, I like the way you talk

[spidge]

Now I am a little confused. The way I read this is that one could wait for the 2nd mortgage to go to a JDB then file a ch 7 and that would take care of the 2nd. But further down in the post it was mentioned that the lien may stay. I am a bit confused by that. Now the original debtor said it was paid in full and they are satisfied, but does that mean the deed is clear?

[albacore44]

Now I am a little confused. The way I read this is that one could wait for the 2nd mortgage to go to a JDB then file a ch 7 and that would take care of the 2nd. But further down in the post it was mentioned that the lien may stay. I am a bit confused by that. Now the original debtor said it was paid in full and they are satisfied, but does that mean the deed is clear?

No. what she did was go through ch-7 on a ride through paying both mortgages. after close of her Ch-7 she stopped paying the 2nd, the 2nd mort then sold account to a JDB and the JDB is making offerings to settle. the JDB s/b holding the lein.

This is the exact thing I would like to do should I decide not to Lein strip through a Ch-13. in my case it might cost me less to settle with a JDB later down the road, rather than suffer in a ch-13, assuming I can get past a UST objection to a Ch-7

[HHM]

In severely depressed real estate markets, this amounts to the "do nothing and see what happens" approach to dealing with 2nd mortgages.

First, the lien of the 2nd mortgage survives a Chap 7 BK, no ifs, ands, or buts, about it. So, that should clear up any confusion on that point. Second, given current valuations, a 2nd mortgage holder is not in a "practical" position to initiate foreclosure, because the 1st mortgage holder gets paid first, and currently home values are too depressed. However, the 2nd mortgage has the "legal right" to foreclose, and that right survies the BK.

Basically, by riding through your 2nd mortgage and not making payments, you are gambling that you can settle the 2nd mortgage at some point in the future after the BK is discharged.

Here are the risks and challenges
1. Obviously, you need to come-up with the money settle. If you just filed chapter 7, how likely is that?
2. The 2nd mortgage company, or JDB, does not have to settle with you. You can't force them, they can sit on it, accumulating interest etc.
3. If you go to sell your house, you will have to deal with the 2nd mortgage then, and they can hold up the sale or even quash it unless they are paid in full. You need to be able to pass clear title.
4. If home values go back up, they can foreclose.
5. You can probably forget about refinancing, same issue as #3, most banks won't refinance the first if the second isn't dealt with in some way.

Regarding the discharge of chapter 7, the JDB should not be contacting you. The ONLY right they have is the right of foreclosure. Aside from letting you know that they own the debt and they are the ones you should be making payments too, they should not be making any effort to collect the debt.

I am not a big fan of this strategy, for most people, it is too risky. Unless you are actually able to settle, you will never generate positive value in your house, you are essentially renting.
To follow-up on JustBrokes comments about JDB's being able to enforce the lien in a sale scenario, realize that the burden will be on the seller. The lien is recorded at the county, it is going to sit there until someone with authority removes it, the lender or a court order. So, if you go to sell your property and do not have funds to satisfy the 2nd mortgage lien, you will have to file a suit in county court to quash the lien (and gamble that the JDB cannot actually show they have the right to collect). Same issue with the foreclosure, if a JDB initiates foreclosure, the burden will be on you to remove the foreclosure to county court to quash the lien and stop the foreclosure.

[spidge]

Thanks HHM for clearing that up.

[justbroke]

I am not a big fan of this strategy, for most people, it is too risky. Unless you are actually able to settle, you will never generate positive value in your house, you are essentially renting.

I'm not either. Thanks for the followup.

[frankies_mom]

Thank you so much HHM for clearing this up and making it "make sense." I am not a fan of this strategy either and did not mean for this to happen. We were in the middle of a loan mod with CITI when United Guaranty Residential Insurance bought it up and then sent it right away to DSC collections. I was initially confused and don't understand why this happened when we were still trying to negotiate with CITI.

HHM - since I am in this mess, what do you think my best course of action is? I would like to, if possible stay in our house. Should I contact the my bankruptcy attorney? Try to settle? try to settle when someday we go to settle? Any advice is greatly appreciated. Thank you!

[frankies_mom]

oops, I meant someday if we go to sell.

[chad9162]

I am not a big fan of this strategy, for most people, it is too risky.

This "strategy" isn't risky at all. My house is under water by almost $140K and with all the layoffs and incomes dropping I don't see values increasing soon. So if I can't settle with the 2nd then I'd just walk away and start over.

Here are some benefits....

1. Yes, theoretically I'm renting, but unlike most renters I get to use the mortgage interest as huge tax deductions.

2. My mortgage is about the same as rentals in my area, but with the tax breaks I'm probably paying a few hundred dollars less.

3. By "riding through" I can walk away at anytime. In this economy that's huge. If I was renting they could sue me if I broke the lease or rental agreement

4. I could pay on my 2nd for 10 years and end up paying $50K but there's no guarantee I'd get it back with appreciation. My house could still be under water! By not paying, I could put that money in a bank account and have $50K.

5. Some people are under water $200K or more. It could take 30 years to get that back. So in theory they could live in the house for a very long time without paying the 2nd!

This whole process has made me think in such a different way. I am now thinking "its just business" like a CEO or a CFO. There's no ethics or morales involved. I mean what would the banks do in your shoes!

[chad9162]

To answer the OP questions, I'd try to settle with JDB and get something in writing that they are releasing the lien.

For me I may still leave, because I could buy a better house at cheaper prices than my current house. SAD!

[HHM]

This "strategy" isn't risky at all. My house is under water by almost $140K and with all the layoffs and incomes dropping I don't see values increasing soon. So if I can't settle with the 2nd then I'd just walk away and start over.

Here are some benefits....

1. Yes, theoretically I'm renting, but unlike most renters I get to use the mortgage interest as huge tax deductions.

2. My mortgage is about the same as rentals in my area, but with the tax breaks I'm probably paying a few hundred dollars less.

3. By "riding through" I can walk away at anytime. In this economy that's huge. If I was renting they could sue me if I broke the lease or rental agreement

4. I could pay on my 2nd for 10 years and end up paying $50K but there's no guarantee I'd get it back with appreciation. My house could still be under water! By not paying, I could put that money in a bank account and have $50K.

5. Some people are under water $200K or more. It could take 30 years to get that back. So in theory they could live in the house for a very long time without paying the 2nd!

This whole process has made me think in such a different way. I am now thinking "its just business" like a CEO or a CFO. There's no ethics or morales involved. I mean what would the banks do in your shoes!

I agree with those facts, but I don't agree that it is the "best" course of action. First, if someone is upside down on their first, they should walk anyway, as you pointed out, it makes more sense to walk and re-buy a house at current market values (that is the best business decision). Second, Number 4, the whole reason someone got into this mess is they couldn't afford their bills, so for the average person, not paying the 2nd doesn't free up money to save (it would be great if it did, but that is not the case for most people in this situation). As for the tax benefit, if the person qualifies for a chapter 7, odds are they don't need the mortgage interest tax deduction. But, yes, it is a nice benefit. But is it worth it to have a non-growing asset.

Those are all reasons used to "talk someone into it", but I don't think those facts really address the goals of most people when it comes to their house.

The Best courst of action for people significantly upside down in their house is to walk, file BK to take care of deficiency, a buy in 2 years.