Cramdowns, Foreclosures, Second Mortgages and BankruptcyPosted on August 11th, 2012 Guest Poster No comments
Primary mortgages are rarely modifiable, even in bankruptcy court. However, your bankruptcy attorney can work with your first mortgage holder to enter a payment plan to make up missed mortgage payments or enter a longer mortgage term to make the monthly payments more manageable. Unsecured second mortgages have more flexibility, both inside and outside of bankruptcy court.
Keeping Your House With a Second Mortgage
For those entering Chapter 13 bankruptcy, the second mortgage can be added to the debt repayment plan along with the primary mortgage. You must include the second mortgage in the bankruptcy petition, whether it is a secured loan or unsecured debt. Then you will need to make the monthly payments on time and in full. At the end of the payment plan, the debt is paid off, payments continue under the mortgage terms reaffirmed by the court or the remaining second mortgage balance is discharged by the bankruptcy court. It is possible that the second mortgage balance is discharged even while the primary mortgage remains. However, you must speak with a bankruptcy attorney to find out if this is an option where you live.
You can save your home from foreclosure even if you have two or mortgages on it. However, you need legal representation to properly renegotiate these loans or enter a payment plan to be able to keep your home. Without legal representation, you may inadvertently agree to become liable for a deficit if the house is later sold in a short sale or foreclosed upon.
Second Mortgages, Foreclosures and Short Sales
If your home is sold to pay your mortgage debts, the second mortgage is paid after the first mortgage is paid. If there is not enough money to satisfy the second mortgage, the remaining debt may be paid out of the money raised by liquidating your assets or it is dismissed when the bankruptcy is discharged. If you sell your home, you can also choose to enter a payment plan to pay off the second mortgage balance.
If the mortgage holder forecloses on the property before you file for bankruptcy, they can take the house regardless of the repayment terms you would like to enter. The balance remaining with the first and second mortgage holders becomes unsecured debt and will need to be included in your bankruptcy petition.
A bankruptcy court in rare instances will force mortgage holders to accept a cram down or reduction in principle, where the court forces the creditor to modify the mortgage agreement to accept less than was originally agreed without reclaiming the asset or forcing its sale. This happens more often with second mortgages than first mortgages. It is rare for a court to cram down or modify a first mortgage. Seek the advice of a legal professional to find out if this is an option in your state. However, your attorney can negotiate with the creditors to turn a 15 year mortgage into a 20 year mortgage or refinance it into a lower interest rate loan. If the home is sold at a loss, as happens with many underwater properties, you need legal representation to prevent a crushing debt load or massive tax bill on the forgiven balance.
Never send back the keys and hope that this will satisfy the mortgage company. While "jingle mail" may be emotionally gratifying, it does not resolve the problems associated with unpaid bills, outstanding mortgage balances or collection efforts.
--About the Author
Michael Bolinske is a Minnesota bankruptcy lawyer at Bolinske Law, helping people improve financial troubles.