Question about Ch. 7 vs. Ch. 13 and Keeping House

[clevelandmom]

Hi everyone,

I have been browsing through many different threads and I have a question. There are some people who are in a Ch. 13 which, for various reasons, appear to not be working out. I have seen comments like "If I go into a Ch. 7 I am going to lose my house." Can someone please explain to me how this works? I am in a Ch. 7 and keeping my house. So naturally, this makes me nervous. Thanks for your input!

[keepmine]

Well, you could lose the house in a 7 if, the equity exceeds what your state exempts.
I believe many fail in bk regardless of chapter because, they are trying to hang on to something they can't afford.
If, your housing exepnse is much over 30% of your net monthly incoemyou're asking for trouble.

[clevelandmom]

Oh, okay. I have no equity in my house (it's upsidedown) and my housing expense is about 33% WHEN my dh is employed. Sigh. . . .

[LadyInTheRed]

Aside from the exemption issue, many in Chapter 13 were behind on their mortgage payments and include the arrears in their plan. If they convert to 7 before the mortgage payments are caught up, they risk foreclosure. Also, if they were stripping a 2nd mortgage, they stopped paying on that mortgage. When they convert to a 7, they lose the benefit of the strip and the 2nd can foreclose after discharge or after obtaining relief from the stay. If the 2nd is still underwater, the chances of the 2nd foreclosing are small until there is equity, but if the same bank holds the 1st as holds the 2nd, foreclosure is more likely.

[clevelandmom]

Oh, thank you LadyinRed. So is that why people would prefer to go into a 13 as opposed to a 7, to save their house because they are behind on payments? I have heard things like, if your house is worth $200,000, and your 1st mortgage is $200,000, and your second mortgage is $50,000, technically the 2nd is considered unsecured because there is no longer equity in the house - is that true? I could technically be in a situation like that, but I won't stop paying either of my mortgages because I want to keep the house. I'm just curious if people are able to discharge a 2nd mortgage like that and still keep their house. Somehow I doubt it, but I'll ask anyway.

[LadyInTheRed]

Oh, thank you LadyinRed. So is that why people would prefer to go into a 13 as opposed to a 7, to save their house because they are behind on payments?

That is one reason. People also may choose a 13 to strip a 2nd mortgage or because they have non-exempt assets they want to keep. I may have qualified for a 7, but I stopped even considering it when I learned I could strip my $88,000 2nd mortgage.

I have heard things like, if your house is worth $200,000, and your 1st mortgage is $200,000, and your second mortgage is $50,000, technically the 2nd is considered unsecured because there is no longer equity in the house - is that true? I could technically be in a situation like that, but I won't stop paying either of my mortgages because I want to keep the house. I'm just curious if people are able to discharge a 2nd mortgage like that and still keep their house. Somehow I doubt it, but I'll ask anyway.

Yes, you can. That is what I mean by stripping the 2nd mortgage. I thought it was too good to be true too when I first heard about it. In a Chap 13, if your house is worth no more than the balance of your 1st mortgage, you can file a petition to have the 2nd mortgage declared unsecured. If the court orders that the 2nd is unsecured, and you finish your Chap 13 plan, the 2nd is paid the same percentage as other unsecured creditors and the 2nd lien is removed from your property (after recording with the county recorder an order specifically declaring the lien is void). If and when you know for sure you will file a Chap 13 and strip the 2nd, and you are comfortable that the valuation of your home is low enough, you should stop paying the 2nd.

If you file a Chap 7 and your 2nd mortgage is underwater and with a different lender than the 1st mortgage, you could stop paying 2nd. As long as you do not reaffirm, your personal liability for the 2nd mortgage would be discharged with other debt in your Chap 7, but the lien will remain on the home and would need to be paid off if you sold or refinanced the home. After discharge of your Chap 7, you can try to settle with the holder of the 2nd mortgage to release the lien in exchange for a payment of a fraction of the balance due. This is not a sure thing and is risky. The 2nd can still foreclose at any time after discharge (or after getting a release from stay). If you are unable to settle and the value of your home eventually increases or you pay down enough of the 1st to create value to the 2nd, they likely will foreclose. You make certain committment to risk once you stop paying the 2nd, because it is really hard to catch up once you get behind.

There have been many discussions of the strategy of filing a 7 and settling with the 2nd. Try a search of the forum.

ETA: Be very careful about chosing a 13 if you qualify for a 7. You will probably have to adjust your budget to below allowed amounts in some areas in order to fund a plan. I didn't claim any maintenance expenses for a second car and claimed a very low housing maintenance expense. But, California has a generous wildcard exemption I was able to use to exempt a $10,000 CD. So, I have something to fall back on if i need to. Don't go into a 13 if the plan is unlivable.

[clevelandmom]

Wow. Fantastic information LadyinRed. Thank you so much! There is no way I could fund a 13 - I have a negative budget right now, and even when my husband goes back to work, we never know for how long it will be. I really appreciate your taking the time to explain it to me.

[keepmine]

Wow. Fantastic information LadyinRed. Thank you so much! There is no way I could fund a 13 - I have a negative budget right now, and even when my husband goes back to work, we never know for how long it will be. I really appreciate your taking the time to explain it to me.

Whatever you do, do not reaffirm that mortgage.
You don't want to obligate yourself to something with negative equity and an uncertain income/employment situation.