Q:  I owe more than my home is worth.  I could afford to pay my bills if I did not have the 2nd and 3rd mortgages on my home.  Is it possible to wipe out or strip my 2nd and 3rd mortgages?

A:  Yes, it is possible to eliminate second and third mortgages in certain circumstances.  The first step to determine which mortgages if any can be stripped off is to accurately value the real property.  Most courts will require a formal appraisal from a reputable appraiser in order to establish the value of the subject real property. 

The value of the real property must be less than the first mortgage in order to eliminate second and third mortgages.  For example, let us suppose that you have a home which appraises at $250,000.00, and have a first mortgage of $270,000.00, second mortgage of $50,000.00, and a third mortgage (home equity line of credit) of $19,000.00.  Since the home is worth substantially less than the first mortgage, the second and third mortgages can be stripped off.  The rationale is that the second and third mortgages are completely unsecured such that the lenders' liens no longer secure the debt owed.  The second and third mortgages as unsecured debt are dischargeable through a bankruptcy case. 

Assume, however, that your home appraises at $275,000.00, the first mortgage is $270,000.00, the second mortgage is $50,000.00, and the third mortgage is $19,000.00.  In this example, only the third mortgage can be stripped off because the second mortgage is partially secured (security of $5,000.00).  A partially secured mortgage cannot be eliminated. 

The stripping of mortgages is currently only permitted by Nevada courts in chapter 13 cases.  Nevada courts are bound by precedent established by the United States Supreme Court and by the Ninth Circuit which ruled that the United States Bankruptcy Code does not provide any authority in chapter 7 cases for the stripping off or elimination of "unsecured" mortgages.

Q:  I owe more than my car is worth.  Can bankruptcy help me?

A:  Yes, possibly.  There are several benefits to filing for bankruptcy relief in your situation. 

1.) If you are paying a high interest rate, a chapter 13 bankruptcy can reduce your interest rate to prime rate plus 2.0%. 

2.)  If you have owned your vehicle for more than 910 days, you can cramdown the debt owed to the fair market value of the vehicle through a chapter 13 bankruptcy.

3.)  You may be able to extend the repayment term of the vehicle loan, thereby reducing the payments, through a chapter 13 bankruptcy.

4.)  If you are extremely upside down on your vehicle, you may be able to redeem the vehicle through a chapter 7 case.  Redemption crams down the debt owed to the fair market value of the vehicle.  It requires making a lump sum payment to the lender which extinguishes the lender's lien.  722 Redemption Funding, Inc., provides redemption loans.  

Q:  Can I keep my home and car that I am still paying for if I file for chapter 7 relief? 

A:  Yes, however, some restrictions apply.  Debts secured against a debtor's property, also known as collateral, are not eliminated by the bankruptcy filing.  Most liens (secured debt) actually survive the bankruptcy filing unless a debtor surrenders the secured property to the creditor during the bankruptcy case.

So a Chapter 7 debtor that wants to keep secured property must meet two conditions:

1.) The installment payments must be current or be brought current immediately; and

2.)  The debtor must continues to make the required installment payments. 

Since liens are only extinguished by the surrender of the subject property, a chapter 7 debtor who wants to keep his personal (not real) property must, in addition to the conditions listed above, perform one of the following actions within thirty (30) days after the first scheduled meeting of creditors:

• Reaffirm the debt
• Redeem the property
• Retain and pay (only if available in the jurisdiction)

Failure to perform the stated intention within the applicable timeframe may result in the creditor's ability to repossess the subject property.                 

DEBT REAFFIRMATION: 

Reaffirming debt means agreeing to pay debt that is otherwise discharged within the bankruptcy. Reaffirming debt allows the debtor to keep the subject property by continuing payments to the creditor. The downside of a reaffirmation is that the debtor’s creditor can pursue collection after the bankruptcy case if the debtor defaults on the reaffirmed debt.

Because reaffirmation is a serious financial decision, the Bankruptcy Code strictly regulates the process. A reaffirmation agreement must contain specific disclosures such as the applicable interest rate and payment terms. The reaffirmation must also be filed with the court prior to the issuance of a discharge order. A court hearing is required to approve the reaffirmation in certain circumstances.

Every debtor has the right to rescind (cancel) the reaffirmation agreement at any time prior to the issuance of the discharge or within sixty (60) days of the filing of the reaffirmation with Court, whichever occurs later. In order to rescind the agreement, the debtor must notify the creditor, preferably in writing, that the reaffirmation is being recinded.

Rather than "eat steel", creditors often will negotiate the financing terms to encourage debtors to reaffirm debt.

REDEMPTION:

Redeeming debt means paying the creditor the full market value (FMV) of the property as opposed to the debt owed.  Redemption is not applicable to real property but is available for personal property such as household goods and vehicles.  Redemption is advantageous if the debtor owes much more than the property is worth. Redemption is essentially a mechanism of cramming down the debt to the FMV.

Redemption requires making a lump sum payment to payoff the secured creditor, thereby extinguishing the creditor’s lien. Redemption generally requires securing a loan from a different financial institution.

Redemption can save the debtor thousands of dollars by reducing the debtor’s monthly payments and even the payment term. Redemption can be also used as leverage to encourage the original creditor to negotiate the terms of a reaffirmation agreement.

Redemption is available only in chapter 7 cases and in limited circumstances. Redemptions must be approved by the Court after proper notice and hearing.   

RETAIN AND PAY:

In extremely limited circumstances, debtors may retain (keep) certain property by merely paying as the parties had contractually agreed.  Because revisions to the Bankruptcy Code have complicated the "retain and pay" option, it is strongly recommended that all debtors consult with a bankruptcy professional before attempting to use the "retain and pay" option.  Creditors may repossess property if the "retain and pay" option is not used properly. 

Most courts do not require debtors to reaffirm a mortgage obligation for public policy reasons.  In fact, reaffirming a mortgage obligation is not specifically required by the Bankruptcy Code.  Because reaffirmations are, in my opinion, a bad financial decision for most debtors, extreme care should be exercised especialy when considering the reaffirmation of a mortgage. 

Attorneys may be able to effectuate a "retain and pay" arrangement with careful legal maneuvering.  Consult with a bankruptcy professional to protect your interests. 

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