Liens on underwater junior mortgages survive chapter 7 New York bankruptcy, which means homeowners will need to keep paying them to prevent foreclosure. Often, the response is to file a chapter 13 case after the chapter 7 one to strip the lien, but there are reasons to be cautious about taking that course of action. Moreover, with any luck, the Supreme Court will come down in favor of chapter 7 homeowners and allow them to strip their underwater junior liens without the chapter 13 filing.
But assuming the Supreme Court follows the current practices of requiring the chapter 13 case, the question becomes what alternatives are there? There are a few.
As stated in my earlier article on the topic, homeowners who elect to sell the home, e.g. in a short-sale, will rid themselves of the lien, which is the only motivation for making the mortgage payments. This idea works best if the junior lien(s) are quite large; however, it’s usually more beneficial for homeowners to reverse the sequence: Short-sell the house first and then file the chapter 7 case to discharge the deficiency, if any, and any other unsecured debts.
It also might not be worth it to bother with the chapter 13 case if the mortgage balance is relatively low. For some homeowners, the goal is to discharge credit card debts or similar loans, rather than the mortgage. This strategy can also be helpful for homeowners who have good reason to believe that their equity positions will improve thanks to economic recovery.
An alternative to selling the home and staying and paying is settling the mortgage with the lender. This idea can work because homeowner’s option of selling the home can leave the lender with nothing as it would receive no monies from the sale. As a result, it’s not uncommon for lenders to agree to settle discharged mortgages for pennies on the dollar. Reaching an agreement with such a lender is usually possible before a bankruptcy, but if one is going to happen or has happened already, then the discharge puts the homeowner in a stronger position. The only time a lender might not accept a settlement is if the mortgage balance is close to being repaid, as in the second alternative laid out above.
Homeowners who owe money on mortgages with no equity have powerful options against junior lenders. Talking to an experienced New York bankruptcy lawyer can help you determine which course of action to take, and my practice has helped clients in these situations reach settlements with their mortgage lenders.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Chapter 13 Bankruptcy Lawyer Brooklyn NY Bruce Weiner for a free initial consultation.
