In the present economic times many individuals are living with financial decisions causing them to hold assets, such as houses, automobiles and boats, whose values have plummeted. Individuals are living in properties whose values have dropped far below the mortgages or driving cars, which are valued at a third of the loans. Those individuals with financial difficulties are looking for assistance through the bankruptcy courts in an attempt to get out from underneath all of the debts and liens acquired, which now vastly exceed their current assets.
There are two types of liens, which can be attached to an individual’s property or assets. The first is a voluntary lien, which is basically a situation where you have agreed to use the asset as collateral for a debt, i.e. mortgages and auto loans. A non-voluntary lien is one that a creditor imposes on you and that gives them the right to force you to sell the asset so that they can be paid, for example: judgments against you or tax liens. These liens are either secured or unsecured as to the asset they are attached to.
The most common issue for an individual nowadays is the situation where a homeowner who has a first and second mortgage on a primary residence is facing bankruptcy and wondering if they have the ability to save the family home. As real estate markets fall and the fair market values of the homes fall, homeowners are left with mortgages that far exceed the current fair market value of their homes. There is a process which could be of help to many in this situation and it is called “lien stripping”.
“Lien stripping” refers to the process of reducing a secured claim to the value of the underlying collateral. It uses the combined effect of 11 U.S.C.A. § 506(a) and 11 U.S.C.A. § 506(d) to bifurcate the lien into secured and unsecured. The secured lien is allowed in the amount up to the fair market value of the property at the time of the stripping. The balance of the lien, which exceeds the fair market value of the property, is now deemed unsecured.
Liens can be stripped off of the debtor’s assets in Chapter 11 or Chapter 13 when there is not enough equity in the assets. Section 506(a) and 506(d) 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 lien is now unsecured. The most common application of lien stripping is the reduction of car loan liens to the present value of the vehicle however it is currently used more often with home mortgages in bankruptcy situations. Lien stripping with car loans has been limited to vehicles purchased over 910 days.
The Bankruptcy Code does permit a bankruptcy plan to “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence”. Section 1322 (b)(2). This section provides protection to the holder of a claim secured only by a lien on the debtor’s principal residence by prohibiting any modification of the terms, however the issue arose as to if this section precluded “lien stripping” of undersecured residential mortgages in the face of Bankruptcy Code section 506 which appears to permit bifurcation of undersecured mortgages and voiding of unsecured portions of the mortgage lien. At least two bankruptcy court judges sitting in Massachusetts have permitted such bifurcations.
In any event, there is an exception as to the lien on a principal residence lien and that is if there is a second or third lien on the same property. In this instance those liens, lien stripping is available to render them totally unsecured if the first mortgage balance equals or exceeds the value of the personal residence. The exception is only if there are two distinct mortgages on the property, not a refinancing situation. It should also be noted that the limitation of lien stripping of first mortgages only apply to personal residences, it will be allowed for a mortgage on a building used for business or renting.
As always, all situations relative to a strategy for bankruptcy and lien stripping should be discussed in detail with a bankruptcy attorney to understand all your avenues open to you.
By: Michael A. Goldstein
Posts Tagged ‘Collateral’
Removing Second Mortgages Though Lien Stripping
January 18th, 2010How Do Second Mortgage Loans Work?
December 27th, 2009
If you need extra money for home improvements, debt consolidation or even to purchase an additional home then a second mortgage might be exactly what you are looking for to make that happen. However, when you hear the term second mortgage you might not be sure exactly what it means. To put it simply it is just another mortgage on your existing home. Basically you are borrowing money for one or more reasons and using your home as collateral.
The term “second” means that the loan you are taking out does not have priority on your home if for some reason you can’t pay it back on time. In all cases the initial mortgage on your home would be paid before any money would go toward a second mortgage payment. With that being said, the next question is why in the world someone would put their home up as collateral for money. Well, the answer is that you shouldn’t unless you are in a situation where you need a large amount of money fast.
Western Vista Federal Credit Union in Wyoming notes that a “second mortgage is what it says – the second loan against a specific piece of property. Consider this example: Let’s say you have a first mortgage on your home. The value is $100,000 and you have a $60,000 balance left to pay on your loan. The $40,000 difference is considered equity, or the part of the home that you own outright. If you wish to further borrow against that $40,000, you would be taking out a second mortgage on the home in order to do so. Why borrow against this equity? In many cases, the interest rate you pay on your mortgage is lower than many other types of loans. Interest is also frequently tax deductible for a first or second mortgage, but not necessarily for a car loan or a credit card.”
When a person borrows money against their home that’s a large chunk of change being used for collateral and it also allows the borrower to get a bigger loan. There are some disadvantages to second mortgages such as the fact that you are taking a chance with your home should something happen and you have trouble paying the second mortgage back.
Take a look at the interest rate on a second mortgage too. You can probably expect the rate to be a bit higher because it is riskier to the lender who knows that if a default occurs the primary mortgage gets paid first and then the second mortgage. You can also be choosy about a second mortgage so check more than one source when trying to make a decision. Watch out too for balloon payments, which is a payment that starts out low and rises as time goes by. If possible, choose a fixed interest rate. Also be aware that second mortgages, like any other loans, have additional closing costs. There are the appraisal fees, application costs and other closing costs that can be as random as title searches.
At the Mortgage101 they say, “Many companies will charge a fee for lending you money. The fee is usually a percentage of the loan and is sometimes referred to as “points.” One point is equal to one percent of the amount you borrow. For example, if you were to borrow $10,000 with a fee of eight points, you would pay $800 in “points.” The number of point’s mortgage companies charge varies, so it may be worthwhile to shop around.”
You also want to make sure you get a second loan that allows you to keep your first mortgage.
In the long run second mortgages are a good bet for home improvement financing and some second mortgages can even be extended for up to 20 years. Remember though, it’s not only home equity lines of credit that don’t outline the amount of the monthly payments so read your contract. There are many second mortgage loans that don’t either. Joe Prussack notes, “Everybody loves low monthly payments… These popular 2nds’ (second mortgages) also usually have adjustable rates so these loans aren’t for the faint hearted.” In this case, if you are one of the fainthearted then stick with a fixed interest rate versus one of the variable interest rate loans. This way you will know exactly what payments are expected each month be it for a second mortgage or another type of loan in order to secure a big ticket item that you have needed for the past few years.
By: Rita Cook
Second Mortgages: What you Need to Know
December 7th, 2009
At times in life it may be necessary to come up with a sum of cash for unexpected expenses or even expenses that you might not be able to afford without a influx of cash. In these cases a second mortgage can come in quite handy. Before taking out a second mortgage; however, you should know how they work and the advantages and disadvantages of second mortgages.
Basically a second mortgage occurs when you take out another mortgage on top of the existing mortgage on your home. This type of loan is secured with the property for collateral. Of course, the first mortgage takes precedence in the event that you default on the loan. Any funds that are left would then be applied to the second mortgage.
Many people commonly use second mortgages for such expenses as home improvements, the purchase of a second or vacation home and to consolidate other debts with a lower interest rate. Of course, you may also be able to use the proceeds of your second mortgage for other options but you should always keep in mind that you are putting your home at risk for the purchase and be sure you can justify the risk for that purpose.
One of the major disadvantages of a second mortgage is that the interest rate will usually be higher than your first mortgage. Lenders insist on higher interest rates because they understand they won’t be the first in line in the event that you default on the loan and they need to protect their assets, so they do this with higher interest rates. Of course, the rates are typically lower than what you could obtain with any other type of loan and much lower than credit cards.
You should also be aware that you’ll typically be responsible for some fairly significant closing costs on second mortgages. If you can’t pay those fees, you may not be able to work out a second mortgage on your property.
Due to the amount of risk involved you need to be absolutely sure you have no other option before taking out such a loan. After all, you are risking the loss of your home, so you should be sure you’re willing to take the risk as well as be relatively sure you can cover the additional loan payments.
If you do decide a second mortgage is the right option for you, be sure to shop around for rates before taking the first one offered to you. You may be able to get better terms or a lower interest rate by shopping around.
Always look over the terms to be sure of what you’re agreeing to pay. One of the most typical arrangements with many second mortgage lenders is to tie what is known as voluntary insurance in with your mortgage. Depending on the level of your current insurance policy, you may not need this additional coverage and cost. In addition, always make sure you know how much you’re paying for closing costs, such as application fees, points to get a lower interest rate and appraisal fees.
By: Joseph Kenny