Tuesday, September 28, 2010

Possible Scenarios

The following was the result of consult with a client and lays out how certain ch 7 and ch 13 options may work in specific situations.

Current facts:
Employment: Temporary employment after a period of unemployment, current income approx: $450/week.
Real Estate: House value approximately $175,000 with a first mortgage balance of $190,000 and a second mortgage balance of $45,000. Both are in default and there is a foreclosure date pending.
Car Payments: None
CC Debt: $15,000
Personal Prop: Retirement account, nothing else of significant value.

Two options, ch 7 and ch 13
Either filing stops the foreclosure sale so long as the case is filed before Oct. 12.

ch 7
A fresh start.
In theory all property transferred to ch 7 trustee for sale (liquidation) with the proceeds distributed to unsecured creditors on pro rata basis and remaining debt discharged.

Property that is fully leveraged (debt against it exceeds value of the property, such as the mortgage in this case), will not be sold however the lien survives which means in order to retain the property, the mortgage must be brought current within about 90 days of the date the case is filed. Also the second mortgage survives as well.

In a ch 7 you can 'surrender' the property to the lien holder (the mortgage co.) and walk away from the house. The debt remaining after the bank sells the property is discharged i.e. there will be no liability for any deficiency debt.

You can remain in the property until the first mortgage again forecloses which will be a minimum of 4 months but has been as long as 18 mos. No payments need be made on the mortgage during this time (allowing you to accumulate funds to facilitate the move and new beginning).

Retirement account is excluded from the bankruptcy and is 100% safe.

ch 13
A reorganization.

Instead of giving assets to court, you retain the assets and 'reorganize' the debt in a ch. 13 plan filed with and administered by the ch 13 trustee.

In your ch 13, filed say Oct 5, you would agree to resume regular first mortgage payments beginning 11/1 and continuing. The plan payment would include the current arrears to the first mortgage (8-10k), costs, and pennies on the dollar to the remaining creditors.

In a ch. 13, it is possible, if the value of the Real Estate and the balance on the first mortgage as above are correct, to file a separate action, in the bankruptcy court to "strip off" the second mortgage and treat it as an unsecured, credit card like debt. If this is successful (very likely if numbers correct as above), then upon the conclusion of the plan (36 months) 1) the first mortgage is deemed current; 2) the second mortgage lien is deemed VOID; 3) all remaining debt including the second mortgage obligation is discharged.

Upon the successful completion, the home will be owned by Client, with one mortgage against it in the amount of approximately $185,000.

Also, in the current environment, it is possible, though I have no control, to 'modify' the mortgage obligation. In my experience this means rolling all the arrears into a new debt and reducing the interest rate for at least five years, (usually to 2 or 3 %). This process can and should take place during the ch.. 13, in fact it should probably begin promptly. I can assist though not formally represent in the matter. The timing is usually about six months to complete the modification.

If modified, you must continue in the ch 13 in order to get the benefit of the lien strip but we can modify the plan to pay only what you can afford to the remaining creditors (again i would anticipate a minimum distribution such as 2-10 cents on the dollar or at total of 2-4 thousand over the 36 months.

The ch 13 can be converted to a ch 7 at anytime, though the lien strip is voided upon the conversion (i.e. the second mortgage would 'reappear' as a lien on the property). So if the income situation changed, the lien strip did not work, or you decided you just did not want the house at any price, we can convert to a ch 7 and proceed as above.

Costs, Attorneys fees for the ch. 7 would be $2500 plus costs in this case, which run around $450. All fees must be paid before the case can be filed as I cannot file as a creditor of yours, (creates instant ethical conflict not permitted by the court).

Attorneys fees for ch. 13 are $3,000 plus approx $2,000 for the lien strip action. I prefer all fees to be paid and held in escrow in advance of the filing however if not possible, some of the fees can be paid through the plan. Costs are a little higher as occasionally an appraisal and or title work are required in the lien strip action.

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