If you’re struggling with your mortgage on your primary home, it looks like you may now have some real home saving tools coming soon in the form of a B and K.
I have been writing about mortgage bankruptcy for quite sometime and how it would benefit struggling homeowners. So, I thought I would condense some of the bankruptcy basics for you to study and get educated on the subject.
Please remember that Citi is the only lender that has agreed to cooperate with the new bankruptcy deal announced last week with conditions.
In a statement, Citigroup said it would support Durbin’s legislation provided that it applied only to mortgages in effect before passage of the act. To be eligible, borrowers would have to contact their lenders and try to work things out before filing for bankruptcy.
Current bankruptcy laws do not allow borrowers to include their primary residence in bankruptcy proceedings. So this controversial move by Citi came as a surprise to many.
Citigroup is agreeing to the bill under the following conditions:
- It applies to loans issued up until the day that the bill is passed. It will not apply to any new mortgages issues by the lender.
- Borrowers have to show first that they made a good faith effort to approach their lender and get a loan workout or loan modification. They must show proof that bankruptcy was not their first option.
- Bankruptcy judges can strip away lenders’ creditor rights if they violated the Truth in Lending Act.
Current bankruptcy law allows judges to approve the loan modifications of the terms of certain debts, namely auto and student loans and second-home mortgages. In the case of second mortgages, if the value of the property falls below the loan amount, debtors potentially could reduce the balance of the loan to equal the current value of the property.
How the mortgage “cram down” bankruptcy legislation if enacted will help struggling homeowners:
- It will encourage lenders to offer more affordable and long term loan modificationsin order to keep homeowners out of the bankruptcy courts. I am sure lenders and mortgage servicers would rather do these loan modifications in secret then with the watchful eyes of the courts. So, this will give borrowers HUGE leverage in negotiating a favorbale loan modificationwith their mortgage servicer or lender.
- We will start seeing more voluntary principle reductions and the over all quality of loan modifications will improve dramatically. This will definitely result in fewer homeowners walking away from their under water homes.
- More ammo in bankruptcy court will mean that more homeowners will get to keep their homes. Currently courts do not have the power to modify home mortgages on a borrowers primary residences. Many homeowners who file for bankruptcy protection today in order to stop foreclosure do with little actual protection from the courts and many lose their homes anyway during the process.
I wrote about bankruptcy, lien stripping and principle reductions a few months ago. So I thought I would highlight some points here for my readers.
- If the courts remove this 2nd mortgage, this is known as “stripping” the lien, “cram down” or “strip down,” which can also occur if the loan is secured by other collateral that is part of the filing or if the home is not your principal residence, or even if the payment structure on the 2nd mortgage falls heavily during the bankruptcy filing itself.
- Additional liens on your home beyond your initial mortgage, whether you have taken a second mortgage or just another related lien, could be negated in the case of a Chapter 13 personal bankruptcy filing.
- Liens can be stripped off of the debtor’s assets in Chapter 11 or Chapter 13 when there is not enough equity in the asset, after deducting senior liens from the property’s current market value, to secure the unsecured in whole or in part, where the lien exceeds the value of the debtor’s property.
- Section 506 of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. To the extent that the claim exceeds the value of the collateral, that portion of the claim is unsecured.
- In Chapter 11 or Chapter 13, even voluntary liens, such as mortgages and security interests, can be stripped down to the value of the collateral, with the exception of voluntary liens secured only by the debtor’s residence. Congress is currently considering changes to bankruptcy law allowing the modification of home mortgages.
- Tax liens can also be stripped off in reorganization proceedings (Chapters 11 and 13) to the extent that the lien does not attach to equity in property. Tax liens can’t be avoided in Chapter 7 on the grounds that they impair exemptions; if the tax is dischargeable in the Chapter 7, the bankruptcy court can determine the amount of the lien that is secured at the time of the filing. Payment of that sum entitles the debtor to the release of the lien.
Read more on mortgage bankruptcy on your second mortgage here.
Moe’s most important tip: Ultimately, working with a qualified tax and real estate attorney or experienced real estate bankruptcy lawyer will help you present your case to the Federal Bankruptcy Court, so it’s important to get qualified legal advice in advance of any filings.
Legal Disclaimer: The comments, posts, threads and material on this websites are NOT to be taken as legal advice and we highly recommend that anyone facing foreclosure should seek the counsel of an attorney and or an accountant. Please ALWAYS obtain a second and third opinion on your particular situation from a trusted source.
We will not be held liable for any material, comments, posts, threads, emails or any communication made while your visit LoanWorkout.org. The comments by us and the materials available at this web site are for informational purposes only and not for the purpose of providing legal advice.
You should contact your attorney to obtain advice with respect to any particular issue or problem. The opinions expressed at or through this site are the opinions of the individual author and may not reflect the opinions of our employers, other ventures or any individual attorney.
No advice or information, whether oral or written, obtained by you or through or from this blog shall create any kind of promise or business relationship. The views and opinions on this website are likely to change over time, we like to keep an open mind and thoughts and opinions stated on out-of-date posts may change over a period of time and may not hold true for the present. You are expected to do your own due diligence and seek advice from other sources such as an attorney.
Comments on this entry are closed.