Here Are Your 2019 Section 109(e) Limit Increases

Section 109(e) of the Bankruptcy Code provides the “debt limits” for Chapter 13 bankruptcy cases: only a person whose claims against them are less than specific amounts is qualified to file a Chapter 13 case.  Typically, the 109(e) limits are updated in the April of odd-numbered years

As of April 1, 2019, those limits will change again. For cases filed on or after April 1, 2019, the 109(e) limits will be $1,257,850 for secured debt (up from $1,184,200) and $419,275 for unsecured debt (up from $394,725).  The Eastern District of California notice describing this and other changes is here.

Usually, secured debts are mortgages and car loans, which are “secured” by the house or car. Unsecured debts are basically everything else. If you have debts in either category over the limits, you are ineligible to file a Chapter 13 Case.

(There are other caveats, such as: the claims must be “non-contingent” and “unliquidated,” and some courts have held that nondischargeable student loans don’t count toward the 109(e) limit calculation.  Ask your lawyer for more info about these issues.)

The 109(e) debt limits play a significant role here in the Bay Area, since mortgages exceeding $1.2 million are commonplace.  Even a 6.2% increase such as this is welcome news to people close to the line.

If you are considering filing a bankruptcy case, regardless of your debt amount, you should speak with a qualified attorney about your options.

Decent Income, but Drowning in Credit Card Debt

Grey and Brown Line Attorney & Law LogoAre you drowning in credit card debt, even though you have decent income coming in? These days, it’s getting harder and harder to avoid this situation.  After taxes get taken out, and after you’re nickel and dimed from all the various companies competing to take your money, your paycheck just doesn’t go that far.  And perhaps you had an emergency where you needed to put a large expense on a credit card, or maybe you had a period of unemployment when you had to use your credit cards in order to survive.  And before you know it, you’re spending $2,000 a month just to make the minimum payments, making the situation worse.

It has crossed your mind to file a case with the Bankruptcy Court to get rid of all that debt, but you have heard that if you make too much money, you don’t qualify.  So what do you do?

It’s true that Chapter 7 cases, which erase all your unsecured debt in a fast, (usually) 3-month process, are “means tested.”  If you make too much money, you don’t qualify.  How much is “too much”?  It’s tough to say; the Means Test is a very complicated calculation.  However, as a rule of thumb, in California with a household size of one and no mortgage, a gross annual of income of around $80,000 starts to be a borderline case.  For a household size of three, $100,000 per year starts to be a borderline case.

If you don’t qualify for a Chapter 7 case, that’s not the worst thing in the world.  It’s better for you to have good income than bad.  And while Chapter 7 may not be an option, you still have Chapter 13.  Chapter 13 is a longer case.  Usually, they take 5 years.  You present the Court with a Plan, and that plan has to pay off certain creditors in full (for example taxes and mortgage arrears, but we’re not talking about those here).  Everybody else, your general unsecured creditors such as credit cards, get paid somewhere between 0% and 100% of what they’re owed.  Where you are on that scale is based on two things: your assets and (more likely) your income.

What if your income is high enough that you would have to pay your unsecured creditors 100% of what they’re owed?  Is there even any point in filing case?  Even there, I would suggest that filing a case would put you in a better position than the status quo.  The important thing to remember here, and this is critical, is that the 100% that is getting paid is the balance as of the time of filing.  At the moment you file a Chapter 13 case, penalties and interest freeze.

Here’s an example:  Let’s say you make $95,000 a year and are single.  You have $60,000 in credit card debt at 6% interest, and are paying $2,400 a month in minimum payments to service that debt.  At that rate, it would take you something like 14 years to pay off that debt.  But let’s say you file a Chapter 13 case.  That $60,000 freezes at the time of filing.  Because of your income, the Means Test says you can afford to pay $1,200 a month to your unsecured creditors, but to pay them off entirely over 60 months, you’d only have to pay them $1,000 a month.  (There will also be trustee fees and lawyer fees involved, but even so you’d be looking at a monthly payment of something like $1,150.)

So in Scenario A, where you don’t file a bankruptcy case, it would take you 14 years to get paid off, having paid a total of nearly $100,000.  In Scenario B, where you do file a bankruptcy case, it would take 5 years to get paid off, having paid a total of $69,000.  I think the benefit is clear.

If you have a decent income but are drowning in credit card debt, you should at least consider filing a bankruptcy case as one of your options.  If you live in the Bay Area, please give me a call so we can schedule a free initial consultation.

Practical Considerations on Discharging Taxes in Bankruptcy

Consideration #1: The Basic Rules for Taxes in Bankruptcy

It’s easy to rattle off the rules regarding the dischargeability of taxes in a bankruptcy case:

  • The tax must have come due at least 3 years before the filing of the case. (§507(a)(8)(A)(i))
  • An actual return must have been filed at least two years before the case is filed. (§523(a)(1)(b)(ii))
  • The tax must have been assessed by the IRS, if at all, at least 240 days before the filing of the case. (§507(a)(8)(A)(ii))
  • You can’t have committed fraud or willful evasion. (§523(a)(1)(C))
  • Only income tax can be subject to discharge.

Sounds great, right? Let’s say it’s February 2018. You had a tax liability for 2013, which came due on April 15, 2014. That’s more than 3 years ago. You filed a return on time, and you and the IRS agree to the amount owed (and hence, as a practical matter, it’s assessed). It’s income tax, and you’re not a member of a tax deniers group. You can file a bankruptcy case and it’s all gone, right? Not so fast.

Consideration #2: Is There a Lien?

When you file a bankruptcy case, the law puts your tax debt into three categories: Priority, Secured, and Unsecured. Any tax that does not meet the 3 year/2 year/240 day rules above is subject to “priority,” and that’s the reason why it’s not going to get discharged.

But then you take a look at all that remaining non-priority tax. If the IRS has not recorded a lien, then great! All of the remaining tax goes into the “unsecured” and is subject to discharge.

However, if the IRS has recorded a lien, then you take a look at your assets. You add up the value of all your assets: equity in your home, in your vehicle, money in the bank, personal belongings, everything. (Everything, that is, except funds in ERISA-qualified retirement accounts such as 401(k)s.) Whatever the value of all that is, an equal amount of the non-priority tax becomes “secured.” And so, that amount doesn’t get discharged either, but for a totally different reason.

Thus the question of whether there is a lien becomes very important. If there is, the only amount that will be subject to discharge will be the amount that’s left after a) you subtract the priority amount, and b) you subtract the secured amount.

Consideration #3: Your Assets and Income

Let’s say you’ve gotten this far and it’s looking good. All your tax is old and you filed your returns on time, and there’s no lien. Next you have to look at your assets and income. This is more a question of basic bankruptcy law than tax law.

If you file a Chapter 7 case, the law puts your assets into different categories, and then puts caps (“exemptions”) on those categories. If you have assets over those caps, a Chapter 7 trustee has the authority to liquidate those assets and divvy up the proceeds amongst your creditors.

So even if all of your tax debt falls into the “unsecured” category, if you have significant assets (such as a house with lots of equity), the IRS is still going to get at least partially paid: they will get a portion of the proceeds from the trustee’s distribution.

If you file a Chapter 13 case, the Trustee does not have the authority to liquidate your assets. However, the Court cannot confirm your Chapter 13 Plan unless your creditors get paid at least as much as they would receive in a hypothetical Chapter 7 case. So whatever the IRS would get if you filed Chapter 7, your Chapter 13 Plan must propose to pay them at least that much over 5 years.

There’s also a consideration of income. Even if all your tax debt is non-priority and unsecured, and even if your assets are below the exemption caps, there is a thing called the Means Test. This is a calculation that tries to come up with an amount that you can supposedly afford to pay to your unsecured creditors through your Chapter 13 Plan. Again, the Court cannot confirm your Chapter 13 Plan unless it pays your creditors what the Means Test says you can afford. And so again, the IRS would at least get something.

It’s Complicated, But There Is Help (and Hope!)

Dealing with taxes in bankruptcy is more complicated than just knowing the dischargeability rules. But perhaps I’ve depicted it as overly complicated here. It’s not really; these are concepts that any experienced bankruptcy lawyer is going to be readily familiar with. What’s more, I have represented a large number of clients in getting rid of a large amount of tax debt. It’s the rare case in which the Bankruptcy Court doesn’t have any kind of assistance to offer.

I post this because I know that there is a great deal of misunderstanding out there about what happens to taxes in bankruptcy, both on the part of individuals and on the part of professionals helping them. It may be more complicated than you think, but there is also more that the Bankruptcy Court can accomplish for you than you think, and only an experienced bankruptcy lawyer can sort it out for you.

HOAs’ Secured Claims Are Limited to Amounts Stated in Lien

If a person files a Chapter 13 bankruptcy case (or a Chapter 7 case where there is a distribution to creditors), creditors must file claims with the court in order to receive any money from the trustee.  Such claims are categorized as secured, unsecured, or some of each.  Claims such as mortgages, car loans, and tax liens are secured and will have to be paid in full.  Credit cards and medical bills are unsecured and can be paid less than 100%.  (In many cases, unsecured creditors get nothing.)

It is not uncommon for people to file bankruptcy cases where there are unpaid HOA dues/assessments, and where the HOA has recorded a lien.  Homeownership issues and foreclosure prevention are, after all, primary reasons why people file bankruptcy cases.  In such cases, the HOA will typically file a claim asserting that the secured portions of such claims consist of not just the amount listed on the recorded lien that they recorded, but of the entire amount that the homeowner owes to the HOA.  Such claims are based on the notion that their liens secure future amounts that come due. This notion is simply not correct under California law.

The District Court for the Southern District of California weighed in on this question back in 1993 (In re Henderson, 155 B.R. 10, 12 (Bankr. S.D.Cal. 1993)), and now so too has the Northern District in In re Warren (N.D. Cal., 2016), bankruptcy case no. 14-31236.

The facts the Warren case are these:  Angela Warren the homeowner failed to make seven HOA payments from December 2007 through June 2008.  The HOA then recorded an assessment lien against the property for those unpaid dues, specifying an amount of $5,865.  The lien also contained language claiming to include other fees, costs, and interest “as may become due to with respect to the Property subsequent to the typed dates set forth above”.  Ms Warren filed a Chapter 13 case in August 2014, then converted it to Chapter 7 in September 2014.  The HOA filed a claim in a total amount of $88,796, with a secured portion of $31,406.  The Bankruptcy Court disagreed and limited the HOA to a secured portion of the $5,865 listed in the lien.

On appeal, the District Court affirmed the Bankruptcy Court’s Decision.  The reasoning is simple: §5650(a) of the California Civil Code requires an HOA to give at least 30 days’ notice before filing a lien to collect “a past due assessment” and that the notice must include, among other things, a statement of the charges owed.  Further, the HOA can only impose liens after a vote by the directors.  The Court noted that the Code’s HOA provisions “reflect the legislature’s intent to impose and rigorously enforce its procedural requirements to protect the interest of the homeowner.”  Therefore, the language purporting to secure future assessments was not permissible under the Code, and therefore the secured portion of the claim was limited to the amount originally listed.  The Court pointed out that the HOA could have continued recording additional liens when new amounts came due, but they didn’t do that.

This is a much-misunderstood area of bankruptcy law, a state of affairs that isn’t helped much by the HOA industry’s continued insistence that their claims are fully secured.  I myself wouldn’t have been aware of these developments if I hadn’t recently heard Oakland’s Judge Novack discussing them from the bench recently.  I hope this information will become more widely known among the debtors’ bar, and you can bet I will be on the lookout for this in future cases with HOA issues.

Bankruptcy News January 11, 2018

Here are your links to consumer bankruptcy news and information from around the internet this past week:

  1. We posted a list of 10 things you should do before filing a bankruptcy case: https://buff.ly/2CJUD00
  2. The Bankruptcy Court for the Northern District of Illinois decided that student loans exceeding the §109(e) limit isn’t grounds for dismissing or converting a Chapter 13 case: https://buff.ly/2ldbFx1
  3. The Georgia Attorney General settled its FDCPA suit with McKevie LLC wherein the deceptive debt collector agreed to drop 11,000 debt collection suits: https://buff.ly/2Dg4FHn
  4. U.S. consumer debt hit an all-time high of $1.023 trillion: https://buff.ly/2CK14jV
  5. The CFPB ranked the banks by number of complaints per $billions in deposits: https://buff.ly/2CZEMeR
  6. U.S. News and World Report published a piece about how student loan refis aren’t right for everyone: https://buff.ly/2pNYlnl
  7. An LA Times columnist wrote about how consumer protections were dismantled in 2017: https://buff.ly/2CG9wBb

10 Steps to Filing a Bankruptcy Case

Filing a case with the Bankruptcy Court can seem complicated and daunting, but it doesn’t need to be that way.   Here are 10 steps to filing a bankruptcy case to help you know what to expect.  I’m providing this list in the hope that if you know what’s in store for you, it’ll be less confusing and stressful.  Of course, this list is no substitute for being represented by a lawyer.  (I would never, ever recommend that you consider that you try filing bankruptcy without a lawyer, and so that is #1 below.)  As you review this list, you’ll see that there are one or two “heavy lifting” items that your lawyer has to do, but that most of it is comprised of information that you have to provide.  Fortunately, providing the information is not too difficult: pulling a few documents from your bank or employer, plus a few online searches, should do it.

Also, be aware that this is just a list of PRE-filing items.  Once the case is filed, there will be a few more things for you to do.  Fortunately, in a consumer bankruptcy case, most of the “big picture” decisions are made before the case is filed.

Here are the basic pre-filing steps:

  1. Get a Lawyer: This is absolutely the first step.  Please don’t try to file a bankruptcy case without a lawyer.  There are many documents to be filed with the Court, and if you fail to do so, your case will be dismissed.  If your case is dismissed, a subsequent case becomes much more difficult.  Moreover, the documents you file with the Court should present a coherent picture to the judge and the trustee.   What are you trying to accomplish with your case? Are your assets protected from liquidation?  How much are your creditors entitled to receive? These are all basic questions that should be very clear from a well-drafted bankruptcy petition.
  2. Determine Your Income: How much money do you make?  From what sources? (e.g. employment, business, social security, retirement, rental, etc.)  How much money did you make in each of the past 6 months? Is there going to be a change in the immediate future?  The answers to these questions are used in the Means Test, which determines whether you are eligible to file a Chapter 7 case, or how much creditors must receive in a Chapter 13 case.
  3. Break Down Where Your Money Goes: You have the same ordinary & typical expenses that everybody has: housing, groceries, cell phone, gas, car insurance, things like that. But you also have expenses that are unique to you.  Are you making payments on student loans?  A payment plan to the IRS?  Domestic support?  Medical expenses? Care and support of a family member? The answers to these questions are also taken into consideration in the Means Test.
  4. List your assets: Do you own any real estate? A business?  Vehicles? Retirement accounts? These are the big items a person usually thinks of as assets, but there are other, easily overlooked items: Does anyone owe you money? Are you the beneficiary of any trust? Do you have life insurance with a cash value? A security deposit with your landlord? An anticipated tax refund?
  5. List and categorize your debts: Who are all the people in the world who say you owe them money?  I think of them as falling into 4 categories: 1) General unsecured debt: credit cards, personal loans, medical bills, deficiencies on repossessed vehicles, etc. 2) Secured debt: generally, mortgages and car loans. 3) “Priority” debt: Debts owed to the government, such as recent taxes, domestic support arrears, fines and penalties. 4) Student loans.
  6. Be aware of potential pitfalls: Are you a married person filing without your spouse? Do you own a business? Have you incurred any new debt recently? Is anyone suing you, alleging fraud?  Have you transferred any property to, or have you paid off, any family members or business partners?  Have you filed previous cases in the past?  These are examples of the kind of thing that can very quickly make a bankruptcy case very complicated.
  7. Figure out what kind of case is right for you: This is a very big decision, and one you probably can’t make without the help of a lawyer. This is probably the first thing any lawyer you speak with is trying to figure out, and it should probably be #2 in this list, except that no lawyer will be able to give you an answer until the answers to numbers 2-6 have been fleshed out.  Just be aware that for most people, there are two kinds of cases, Chapter 7 and Chapter 13.  If you have modest income and modest assets and entirely unsecured debt, Chapter 7 is almost certainly better for you.  If you are trying to stop a foreclosure, Chapter 13 is almost certainly better for you.  However, most people are in between, and there are pros and cons to each kind of case, and you need a lawyer to help you figure it out.
  8. Take your pre-filing class: Everyone who files a bankruptcy case has to take 2 classes, one before you file, one after. People typically take them online.  They take about 2 hours each.  If you don’t take the pre-filing class, your case gets dismissed.  If you don’t take the post-filing class, you don’t get a discharge.  The certificate showing you took the pre-filing class must be attached to the petition when you file your case.
  9. Prepare the petition, schedules, and other documents: A typical consumer bankruptcy filing consists of around 40 to 60 pages.   Much of the information contained therein is comprised of the income, assets, expense, and debt information discussed above.  You have to swear under penalty of perjury that it is all true and accurate.  As mentioned above, it is especially important that the documents present a coherent picture.
  10. Pay the filing fee and file the case: As of today, filing fees for a Chapter 7 case are $335, and $310 for Chapter 13.  Most bankruptcy lawyers will file your case electronically, although it is possible to go to the clerk and file paper documents.  In my practice, I do not file “skeleton petitions” (just a couple basic documents, with the rest needing to be filed later) unless it is absolutely necessary.  And if you have done all the preparatory work listed above, it generally will not be necessary.

That’s it.  Filing a bankruptcy case shouldn’t be confusing or scary.  The hardest parts will probably be meeting with, paying, and getting documents to your lawyer.  Don’t worry; most bankruptcy lawyers do this kind of work because they want to help people.  They won’t bite.  Perhaps more importantly, as lawyers, they have ethical obligations to you that other people don’t (such as debt consolidators and “foreclosure prevention” realtors).  In my practice, initial consultations are free.  If you need help, call or email me today.

Fremont Main Library Presentation (Tues., April 11 at 7:00 PM) – Filing Bankruptcy: What It Really Means and How It Helps

Please join me at the Fremont Main Library on Tuesday, April 11, 2017 at 7:00 PM for a presentation I’ll be giving on “Filing Bankruptcy: What It Really Means and How It Helps.”

This presentation is part of the library’s Smart Money Week.  It’s designed to inform, answer questions, and dispel myths about the bankruptcy process.  I really love doing programs like these because they’re a chance to connect with people who might be unsure about calling to schedule a consultation.  Topics to be covered include:

  • Using income, assets, expenses, and debts to predict your case’s outcome
  • The differences between Chapter 7 and Chapter 13
  • What can disqualify you from filing a case
  • What the Court’s protection covers
  • What assets you can keep
  • When not to file (or wait)

The Fremont Main Library is at 2400 Stevenson Blvd Fremont, CA 94538.  Presentation will last 90 minutes.

Link to program announcement: http://bit.ly/2mTIwIj

Bankruptcy News: Nov. 23, 2016

Here are your links to consumer bankruptcy news and information from around the internet this past week:

  1. New Case Comment: Lua v. Miller, No. 15-56814 (9th Cir.) – Does equitable estoppel under state law prevent a debtor’s amendment of claimed exemptions? (National Consumer Bankruptcy Rights Center)
  2. New Case Comment: Max v. Northington, No. 16-172 (M.D. Ga. Oct 27, 2016) – Vehicles subject to title pawn are property of the bankruptcy estate where the debtors filed their bankruptcy petitions prior to expiration of the redemption period. (National Consumer Bankruptcy Rights Center)
  3. New Case Comment: Rupp v. Pearson (In re Pearson), No. 15-4191 (10th Cir. Nov. 7, 2016) – Where the debtor’s historical use of bankruptcy filings suggested improper purpose to hinder and delay creditors, the trustee’s adversary complaint stated a claim for violation of section 727(a)(2)(A). (National Consumer Bankruptcy Rights Center)
  4. Article: NYC Foreclosure rate is booming – It’s starting to feel like 2007 again, but we’re not quite there yet.  While most of the country inches toward recovery from the foreclosure crisis that began almost a decade ago, New York City isn’t as resilient. (New York Business Journal)
  5. Article: Consumer Credit Default Rates Rise According To The S&P/Experian Consumer Credit Default Indices – Data through October 2016, released today by S&P Dow Jones Indices and Experian for the S&P/Experian Consumer Credit Default Indices, a comprehensive measure of changes in consumer credit defaults, showed small increases in national default rates during the month. (PR Newswire)
  6. Report: Growing Personal Loan Balances Fuel Consumer Credit Markets – Consumers’ personal loan balances, including for credit cards, continued to increase in the third quarter this year while delinquency rates remained low, according to TransUnion’s latest Industry Insights Report. (ACA International)
  7. Article: Student, Auto Loans at New All-Time High of $2.5 Trillion; Consumer Credit Jumps by $19 Billion – The Fed’s latest consumer credit report revealed that in September, overall household credit rose by a greater than expected $19.3 billion, above the $18 billion expected, if below last month’s near-record $26.8 billion. (24/7 News letter)

In re Rosa: Chapter 20 Stripped Liens Are Not Allowed Unsecured Claims

As discussed on this site, “lien stripping” is a common occurrence in Chapter 13 cases, and can provide an enormous benefit to Debtors. The idea is that if there is more than one lien against a piece of real estate, and that piece of real estate is worth less than the amount owed on the first lien, there is no equity remaining to secure the junior lien(s). It is therefore “stripped” and treated like general unsecured debt (i.e. it is dischargeable).

As also previously discussed, a “Chapter 20” case is when a person files a Chapter 7 case, shortly followed by a Chapter 13 case. There are many reasons why a person might do this, but usually it’s because he or she has too much unsecured debt to qualify for Chapter 13. You file a Chapter 7 case, get rid of all the unsecured debt, and then file the Chapter case, often to strip a junior lien (which is not available in Chapter 7 under the Supreme Court’s Dewsnup decision).

Back in 2012, the North case became the local precedent establishing that a Debtor in a Chapter 20 case could indeed strip junior liens, even though there was no discharge in the second, Chapter 13 case. Now in 2015, In re Rosa has become the local precedent establishing that stripped liens are not allowed unsecured claims.

Are Chapter 20 stripped liens allowed claims?

Diana Rosa filed a Chapter 7 case in 2012. After receiving her discharge, the only debt she had left was a $700,000 mortgage against a house worth $350,000 ($44,000 in arrears), a $84,000 second mortgage to EMC, $8,500 owed to the IRS, and $300 in general unsecured debt. She then filed a Chapter 13 case, in which she stripped the second mortgage and proposed a Plan that would pay the IRS and the unsecured debt in full. As to the arrears on the first mortgage, the Plan stated that she was seeking a loan modification.

All parties agreed that Rosa’s personal liability on the second mortgage had been discharged in the Chapter 7 case, and that EMC’s in rem rights were extinguished when the lien was stripped. However, the Chapter 13 Trustee objected to the Plan, contending that EMC held an unsecured claim that needed to be paid in full.

The Chapter 13 Trustee cited Akram from out of the Central District (259 B.R. 371, 2001) and Gounder from out of the Eastern District (266 B.R. 879, 2001) to support the position that EMC held an allowed unsecured claim. As to Akram, the Court rejected what it called that decision’s “attempt to circumscribe the power of the discharge injunction.” As to Gounder, the Court rejected that decision’s conversion of the discharged junior mortgage into an unsecured claim against the Chapter 13 estate: if there is no claim against the debtor, there can be no claim against the estate. Additionally, the is no language in §506(a)(1) converting a nonrecourse claim into a recourse obligation. As to both decisions’ argument that holding otherwise would create a back door around Dewsnup’s prohibition on Chapter 7 lien strips, the Court held that such arguments are better suited for bad faith objections.

Ms Rosa case was allowed to proceed and her Plan was confirmed with EMC receiving anything.  If she completes her Plan, that second mortgage will be gone forever.  A very technical case indeed, but very good for debtors: the upshot is that Chapter 20 lien strips continue to be alive and well here in the Northern District of California.

Lien Stripping in Chapter 13 (Bankruptcy Basics)

What Does It Mean to “Strip” a Lien in a Chapter 13 Case?

Simply put, if you own a piece of real estate, and there’s more than one mortgage on that real estate, and the value of the property is less than the amount owed on the first mortgage, and you file a Chapter 13 bankruptcy case, the idea is that there is no equity present to secure the second mortgage.  Therefore, the second lien is “stripped,” and the second mortgage is treated like unsecured debt (like credit cards and medical bills).  The benefit of having that mortgage treated like unsecured debt is that it becomes subject to discharge and allowing you to pay less than 100% of the amount owed.  It’s important to note that the principle applies to all subsequent liens, e.g. HELOCs and HOA liens.

Lien Stripping in Chapter 13 in More Detail

Many homeowners have more than one mortgage on their homes. And depending on the vicissitudes of the residential real estate market, many homes are worth less than what the homeowners owe on them. That means that if a lender foreclosed on a house and sold the house at auction, there wouldn’t be enough money to pay off all of the lenders. Bankruptcy law has a process where homeowners who owe more on their home than it is worth can have a second mortgage striped away or wiped out by the order of a bankruptcy court.

Not all debts are considered equal in bankruptcy. Some debts are given a higher priority than other debts. In the case of real estate the earliest recorded lien is given the highest priority by the court. For most homeowners this means that a first mortgage will be a higher priority debt than a second or third mortgage. Because there are never enough assets to pay all creditors back in full, the court gives priority debts the first chance at getting paid back. Debts with lower priority are often completely erased, with the creditor not getting anything.

A mortgage is the most common type of lien that can be entered against real estate, but there are other types of liens such as from a court judgment or an HOA lien. Lien striping works for more than just mortgages, but may be limited in certain situations such as cases where a divorce judgment has created a lien.

The Difference Between Secured and Unsecured

Debt can either by secured or unsecured. Secured debt means the debt is attached to something particular. A mortgage is a secured debt because it is backed by the real estate. The creditor has the right to foreclose if they are not paid. But, when there are multiple mortgages on a home and the fair market value of the home is less than the amount owed on the mortgages, some of the mortgages are not secured by the house. The rule for these mortgages is that if the house were sold and there would not be enough money to pay off the first mortgage, all the other junior mortgages are wholly unsecured.

Lien stripping allows a court to erase the wholly unsecured mortgage.

Not All Bankruptcies Work the Same

If you are behind in your house payments or are facing foreclosure the only way to protect your house in most circumstances is to file for a Chapter 13 bankruptcy. A Chapter 13 bankruptcy allows the court to restructure your debts so that you can pay off the highest priority debts, such as a first mortgage, while lower priority unsecured debts are often erased.

Usually a Chapter 7 bankruptcy will not work to save a house because Chapter 7 is not about restructuring your debt and is instead about liquidating certain assets and paying off as many creditors as possible before erasing the rest of the debts.

However, every case is unique. If you are having difficulty staying current with your house payments, you need to get expert advice. You may be able to benefit from a bankruptcy that lets you keep your home and strips off other liens. Don’t wait to get good legal advice until its too late. Contact a bankruptcy lawyer today.