Archive for the ‘lien’ Category
Monday, December 20th, 2010
With the decline in Atlanta area housing values, a seldom used bankruptcy technique has taken on new life. The technique is called "lien stripping" and it arises from Bankruptcy Code Section 506(a) and (d). A lien strip allows a Chapter 13 debtor to use the power of the Bankruptcy Court to transform a secured second mortgage or home equity line of credit into an unsecured debt, thereby eliminating a monthly payment and reducing total debt by tens of thousands of dollars.
Here's how it works: Let's say that you own a home worth $250,000. Perhaps that home was worth $350,000 three or four years ago but its market value has dropped because of the recession. The balance on the first mortgage is $270,000 and the balance on the second mortgage is $45,000.
In this case, a Chapter 13 debtor can ask his bankruptcy judge to "strip away" the second mortgage debt since all of the value in your home is encumbered by your first mortgage. In other words, if you were to sell your house, the first mortgage lender would not be paid in full and the second mortgage lender would get nothing. The second mortgage lender is, therefore, unsecured.
Lien stripping only works when:
- you are a debtor in a Chapter 13 case
- the fair market value of your house is less than the balance due on your first mortgage
The Clerk's Office of the Northern District of Georgia has provided us with sample lien stripping motions, which you can review by clicking on the link.
I suspect that mortgage companies will mount challenges to lien stripping. There has already been a Minnesota case where a local judge there refused to allow lien stripping. One day this issue may be considered by the United States Supreme Court. For now, however, most bankruptcy judges will allow lien stripping and if your second mortgage or HELOC is fully unsecured, you may want to consider it as well.
My friend and colleague, Charleston bankruptcy lawyer Russ DeMott has published a clear explanation of how he approaches the mortgage lien stripping process (in his district, they refer to lien stripping as "mortgage stripping" but the concept is identical. You can read Russ' post by clicking on the link. Russ correctly points out that out of banks and mortgage companies have not cooperated in out of court mortgage modifications and that lien stripping remains perhaps the most reliable tool to modify a mortgage.
I have successfully "stripped" several junior mortgages. Not surprisingly, the main issue that arises has to do with the fair market value of the home. You may need to pay for an appraisal to convince the judge that the second mortgage is, in fact, fully unsecured.
Posted in Chapter 13, Chapter 13 issues, Lien stripping, Mortgage, and, approaches, bankruptcy mortgage modification, called, in, lien, modifying mortgages bankruptcy, motions, process, refused, remains, sample, stripping, stripping , the, unsecured lien | Comments Off
Tuesday, August 3rd, 2010
I recently received an email from a blog reader asking about his obligations to his mortgage company when he does not reaffirm:
I have read your blog and you are very through so I write you with hopes that you might answer this question for me. I file Chapter 7 in 08, and did not reaffirm my loan. I am still living in the house and did make some payments. However, i have not for the last 8 months. It is my understanding that I must sign a document to reaffirm and that continuing payment in itself is not a reaffirmation…or? Well it gets a little more complicated. My house is valued at $410,000 and the bank has offered me a deal that is going to be hard to refuse. They have agreed to let me do a short re-fi in the amount of 180k. If I agree to that is that in itself a reaffirmation?
Here is my response: in most cases, when you take out a mortgage loan, you are signing two different types of agreements. The first type is a promissory note whereby you personally agree to make the payments. The second type of obligation creates a property lien, meaning that you, as the owner of the property, pledges that property as collateral for the loan.
When you file a Chapter 7 and receive your discharge, your personal obligations are extinguished. However, a Chapter 7 discharge does not eliminate the mortgage company's lien against your property. If you "reaffirm" your mortgage, you are actually reaffirming the promissory note and your personal obligations to pay.
For years, many bankruptcy attorneys advised their clients to avoid signing reaffirmation agreements for mortgages, car loans or any other secured debt. The reasoning – even without a personal "guarantee" lenders are protected by the property lien. If the lender is willing to accept payments (the so-called "stay and pay" option), the now discharged debtor keeps his property, keeps making payment, but does not have personal liability on the note.
If the debtor misses payments, the lender would still have the right to foreclose or repossess based on the property lien. The debtor would not have personal liability for any foreclosure or repossession deficiency because his personal liability was extinguished in the bankruptcy.
There is a downside to this "stay and pay" strategy. First, the debtor does not get any credit report benefit for making payments. Because the debtor's personal obligations have been extinguished, the lender no longer reports either a positive or a negative payment history. A positive payment history from a mortgage company can be a good way to restore credit after bankruptcy, and if you do not reaffirm, you will not get this benefit.
Second, there is the "uncertainty factor" if you do not reaffirm. Most mortgage or vehicle finance installment notes contain a default provision that includes bankruptcy as a default trigger. In theory, at least, once your bankruptcy is closed (and the automatic stay of bankruptcy terminated), your lender could declare your loan in default and take action under State law to recover the collateral. In my experience, lenders would much rather have monthly payments than your collateral but this risk does exist.
Finally, many of my readers have asked me if there is such a thing as "constructive reaffirmation" meaning that by making payments, are you in effect re-obligating yourself? Are you creating a contractual obligation by your actions?
I think that the answer to this depends on State law but I would suspect that a mortgage or vehicle lender would have a hard time making this argument. In many States (such as in Georgia) a financial obligation related to real estate must be written and they must have specific terms. As a matter of general contract law, a contract usually will not be enforceable if its terms are not specified. I would argue therefore that a debtor's actions of simply making payments and the lenders actions of accepting such payments should not be enough to create personal liability on the part of the debtor. I would be interested to know if any of the attorneys who read this blog have a different opinion or if anyone is aware of any case law that says otherwise.
At a minimum, if a lender tries to make the argument that you have somehow re-obligated yourself personally by your act of making payments, I would insist that the lender provide you with case law or other support for its position, and you should consult with a lawyer before agreeing to any payment or taking any action (like signing a new, valid contract) that could create personal liability.
My reader states that his lender has proposed a refinance for $180,000. He did not say, but I presume that his prior (discharged) mortgage was much higher than this and that his current payments under the "stay and pay" are based on this higher balance. If he enters into a mortgage contract for $180,000, that contract will function like any other mortgage – and include both personal liability under a promissory note as well as a property lien. It is not a reaffirmation because the bankruptcy is over – instead, the proposed $180,000 loan deal is equivalent to a new mortgage. This proposed deal could result in lower payments plus positive credit history, but it will also create personal liability that currently does not exist. I would certainly advise my reader to discuss his options with an attorney so that he will fully understand the implications of his decision.
Posted in Chapter 7 issues, Lenders, Mortgage, Mortgage modifications, Obligation, Post bankruptcy credit rebuilding, Reaffirmation and negotiation, a, actions, agreements, and, avoid, clients, contract, create, creates, enters, history, history , liability, liability my, lien, making, mortgage loan reaffirmation, negative, note, payment, payments, personal, positive, promissory, property, reader, reaffirmation, reaffirmation after bankruptcy, reaffirming, refinance and bankruptcy, signing, simply, states, the, type | Comments Off
Thursday, April 15th, 2010
Earlier this month I received a call from a Chapter 7 client that I had represented several years ago. He is attempting to refinance his house and has discovered that a judgment creditor has a lien for several thousand dollars. The creditor was listed on the case, but neither he no I knew that there was any judgment.
I directed him to visit the county courthouse and pull the file for this case. He did and he reports that the return of service shows that his wife was served by a sheriff's deputy. His wife has no recollection of being served. We did list the creditor on the bankruptcy petition but because we did not know that there was a judgment, we did not file a motion to avoid the judgment lien. What can he do?
There are a number of lessons you can learn from this man's experience. First, you should always obtain copies of credit reports from all 3 credit bureaus prior to filing bankruptcy. In Georgia, you can get a free credit report from each of the 3 main credit bureaus twice a year. Online, you can go to annualcreditreport.com and download your reports. Because credit reports obviously contain sensitive information the annualcreditreport.com system will ask several questions to identify yourself. These are usually multiple choice questions – for example, the system may say "your credit report shows that you previously lived on one of the following streets: (a) Oak Street (b) Thompson Street (c) Ivers Road (d) none of the above.
If you are unable to answer these questions, the system will instruct you to mail away for your credit reports – here is a link to a page on my website with the credit report request letters.
Credit reports are helpful because they will usually show pending lawsuits as well as the names, address, account numbers and debt amounts for most of your creditors. Obviously I can't require all bankruptcy clients to bring me credit reports but it sure helps avoid "forgotten" creditors or judgments.
As far as what we can do, there are a couple of options. First I want to make sure that service of process was correct. If you are served with a lawsuit in Georgia, the sheriff's deputy (or private process server) has to complete a document called a "return of service" that states when a party was served and by whom. Section 9-11-4 of the Official Code of Georgia provides that service on an individual must be made on the defendant himself, or "by leaving copies thereof at the defendant´s dwelling house or usual place of abode with some person of suitable age and discretion then residing therein."
In this case, if the sheriff's deputy served my client's wife, then service is most likely valid.
However, I sometimes see situations where the return of service is unclear as to who was served or even situations where the return of service is blank. In these cases, a defendant can "collaterally attack" the judgment on the grounds that service was not made and he did not know about the lawsuit.
If it turns out that service is valid, my client will have little choice but to negotiate a settlement of the real estate debt. Interestingly the Chapter 7 discharge would eliminate any personal liability he might have for this debt, but the liability remains as to his real estate.
My experience has also been that judgment creditors will become more amenable to negotiation the longer a real estate lien remains unpaid. Here, my client could forego a refinance (or threaten to to forego a refi) and use the argument that the judgment creditor might have to wait for years to get paid as leverage to negotiate a reduced payoff.
Posted in Chapter 7, Chapter 7 issues, Credit, Negotiation, Post bankruptcy credit rebuilding, a, amenable, avoid, bankruptcy and judgments, client, deputy, estate, forego, judgment, lawsuit, letters credit, lien, lien , longer, my, or, post-bankruptcy, private, process, real, refinance, remains, report, reports, request, served, server, the, threaten, unlisted judgment creditors, unpaid , wife | Comments Off
