Written by: Bankruptcy Attorney, Elizabeth C. Kamper
Chapter 13 bankruptcy offers highly effective solutions for Arizona homeowners dedicated to keeping their homes who have been left high and dry by failed or unsatisfactory attempts at modifying their home loans. If you are one of the countless Arizona homeowners who attempted home loan modifications looking for a lower interest rate, more affordable mortgage payment or even in pursuit of the ever elusive concept of “home equity”, chances are that bank and government sponsored modification programs didn’t work for you. The reasons why your bank didn’t successfully modify your mortgage you are too many to list here but the results are usually the same- “help” that came too little and too late. If any of this sounds familiar, Chapter 13 bankruptcy may just be the key to staying in your home and even, possibly, reducing the amount you owe.
There are two major ways that a Chapter 13 Bankruptcy can help you recover from a failed or unsatisfactory loan modification. First, if you are facing foreclosure as the result of arrears accrued during your modification, Chapter 13 bankruptcy protection can stop the foreclosure process and help you catch up on your payments. Second, if you have more than one mortgage, a Chapter 13 bankruptcy may eliminate additional mortgages (junior liens) if you meet certain qualifications, allowing you to keep your home and pay off only your first mortgage.
Saving Your Home from Foreclosure
Chances are that if you were involved in a loan modification, your bank told you that you would have to stop making mortgage payments in order to be considered for a program. You, as a responsible homeowner, complied with your bank’s instructions, not realizing that if you were not approved for the modification you would be expected to catch up on all of the arrears right away or be forced into foreclosure. If you are like most homeowners, you don’t have enough money in the bank to pay off the entire balance of your arrears in one lump sum and you are left facing the very real possibility of foreclosure. Filing a Chapter 13 bankruptcy case before your sale date invokes the protection of the Bankruptcy Court, forces your bank to stop foreclosure proceedings and allows you to catch up on your arrears over the life of your 3-5 year Chapter 13 bankruptcy plan (all without interest on those arrears).
If you are a homeowner facing foreclosure after exhausting work-out options with your bank and you are willing to make payments towards your arrears over a period of time while continuing to make your regular monthly mortgage payments, then Chapter 13 bankruptcy may just be the answer you are looking for.
“Stripping Off” Junior Mortgages in a Chapter 13
If you are like the majority of Arizonans who are significantly underwater in their homes and you have one or more junior mortgages [a second mortgage, third mortgage or Home Equity Line of Credit (HELOC) which is no longer secured by equity in the property], you may be able to do a “strip off” or “lien strip” of the junior mortgage(s) and walk away at the end of your Chapter 13 with only one mortgage. Lien stripping also benefits Chapter 13 filers by allowing them to stop paying their junior mortgage payment as along with any arrears that have accrued on the junior mortgage.
A lien strip forces your junior lienholder to release your lien at the completion of your Chapter 13 Plan under certain conditions: you must make all your required monthly Chapter 13 and first mortgage payments and you must not convert to another Chapter of Bankruptcy. If you do this, the Court will treat the junior mortgage as a general unsecured claim, and you will discharged from the balance of the junior mortgage along with all your other unpaid unsecured debt discharged from all your other unpaid unsecured debt. As a result of this discharge of the junior lien your bank will be required to release their lien on your home. The lien strip is not automatic, however, and your bankruptcy attorney must file a Motion to Avoid a Lien with the Court and have it granted or else the junior lien will survive the bankruptcy.
To be eligible to strip a junior lien you must first qualify for Chapter 13 bankruptcy (be able to make a regular monthly payment) and your first mortgage must be more than the verifiable current value of your property. You must also be willing to make all of the required payments under your Chapter 13 Plan. Finally, you must be aware that your monthly Chapter 13 payment will be based on your “disposable income” in a Chapter 13 and you will be required to pay as much of your unsecured debt (including the junior mortgage) as you are able to afford based on this figure.
If you are dealing with the aftermath of a failed loan modification and are interested in finding out more about how Chapter 13 can help you catch up on your mortgage payments or reduce the amount you owe on your house, or even if you would just like to explore the possibility of stripping a junior lien or liens from your underwater home, please call to set up a confidential consultation with me.