Do I have to pay a line of credit if it was included in chpt 7

[Anonymous]

My husband and I filed chpt 7 in Jan 2008. We included our 1st Mortg and our 2nd (line of credit) in the bankruptcy.  We have continued to pay both until this August, 2009.  I find out today that my husband stopped paying our 2nd (line of credit) in August, 09, because he said that we didn't have to pay it, since it was included in the bankruptcy and that most likely they would not do anything about it.  If I recall, when we took out the 2nd, I believe it was secured with a deed of trust.  If so, can't they foreclose on us, just like a 1st could?  Do they have the same rights as our 1st?  What would the 1st do if the 2nd sent a forclosure letter?  I tried calling both banks, but can't seem to get anyone to talk to me about this.  Has anyone experienced this before?  Is my hubby way off base.....or am I?  BTW, the 2nd is not showing up on my credit report as a balance. It shows $0 and included in bankruptcy.  But my 1st is still showing on my credit report with a balance.  Should they show on the credit report or not?  Thanks for any info you can share.

[Anonymous]

If you included the mortgages in your bankruptcy, why did you continue to pay?  It sounds like you continued to live in the home.

Anyway, if you continued to pay, and they accepted payments, then they left well enough alone.  But secured debts are not discharged in BK 7 usually.  The second mortgage could be a little different, but usually if you file BK, you have to continue to pay (usually through a reaffirmation agreement accepted by both parties and provided to and approved by the trustee).

If you don't reaffirm and/or don't continue to pay, then YES you will lose the home.  Filing BK doesn't discharge the debt without liquidating the asset.

I would contact the BK attorney right away and ask on the matter.  Do not just take your husbands word for it, otherwise you may end up in a foreclosure and eviction.

[Anonymous]

Yes, we did include both mortgages in the bk and we did not reaffirm them per our attorneys advice.  We have continued to live in the house and have been able to make both payments so far.  But now since hubby thinks we don't have to pay the 2nd, he stopped and I am concerned that they can still foreclose on us.  I know that we can walk away from the house at anytime and not be held responsible for the loans.  If the economy was better, we would probably try and sell the house, but right now, it wouldn't sell for enough to pay both mortgages.  Plus, due to a business adventure gone bad and my partner going south on me (which is why we had to file bk anyway), I now have a fed tx lein on the house.  Yes....it went from bad to worse. 

It doesn't make a lot of sense to still live here, but our choices are pretty slim since we probably wouldn't be able to buy a house at a decent interest rate and if we rent I'm not sure what would happen with the tax lein.  None the less, I need to find out about not paying the second and if they could indeed move forward with foreclosure.  We're not talking about a small second either.  It is as much as the 1st ($95,000), so with that much at stake, I think they would foreclose.  Just trying to see if anyone has gone through this or have any other advice.  WWYD?

[Anonymous]

The second lien is secured by the value of the home so, yes, that lienholder CAN foreclose. However, unless you have substantial equity above the value of the first mortgage, there wouldn't be much point, because the first (priority) lienholder is going to be paid before the second one gets anything. If, for example, you owe $100,000 on the first mortgage, that mortgage holder will get any sale money up to that amount. The second lienholder would only get any proceeds above that. So, if your second mortgage holder thinks it can net something from a forced sale instead of the $0 your husband is suggesting you pay, you may well be in danger of foreclosure.

[Anonymous]

Thank you both for your comments.  So, here are more details:  Our first is at $97,000, our 2nd is at $95,000 plus a $13,000 fed tax lein.  According to our market value, if we were to sell the property today, we would be lucky to get $180,000, primarily due to the land and location.  If I understand it correctly, Uncle Sam would get his share first, then the 1st and whatever is left over would go to the 2nd, or say roughly $70,000.  Looking at it that way, the 2nd would probably see that as worth pursuing and go ahead and foreclose. 

We would be forced to leave the house, and find a place to rent probably...but we would walk away without owing anything or having it reflect on our credit report, since both loans were included in the chapter 7 filing, plus Uncle Sam would be taken care of.  I'm thinking this may be the way to go for us in order to get back on track with getting our credit rebuilt.  Or, do you think it would be worth staying in the house, continue trying to make both payments and ride out this horrible economy in hopes that the housing market will take an upswing and then sell at some future date? 

Just curious what you think you would do in our position.

[Anonymous]

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@Anonymous wrote:

Thank you both for your comments.  So, here are more details:  Our first is at $97,000, our 2nd is at $95,000 plus a $13,000 fed tax lein.  According to our market value, if we were to sell the property today, we would be lucky to get $180,000, primarily due to the land and location.  If I understand it correctly, Uncle Sam would get his share first, then the 1st and whatever is left over would go to the 2nd, or say roughly $70,000.  Looking at it that way, the 2nd would probably see that as worth pursuing and go ahead and foreclose. 

We would be forced to leave the house, and find a place to rent probably...but we would walk away without owing anything or having it reflect on our credit report, since both loans were included in the chapter 7 filing, plus Uncle Sam would be taken care of.  I'm thinking this may be the way to go for us in order to get back on track with getting our credit rebuilt.  Or, do you think it would be worth staying in the house, continue trying to make both payments and ride out this horrible economy in hopes that the housing market will take an upswing and then sell at some future date? 

Just curious what you think you would do in our position.

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You have a federal tax lien, correct?  Normally federal tax liens are against you, not the home.  They can pursue you and obtain judgements to seize or foreclose property to satisfy the lien, but they don't automatically get a lien on the home.  Did the IRS sue you?

Homes are generally exempt from federal tax liens or other debts in most states due to various homestead laws and exemptions.  Usually the only thing that can foreclose on a home is a mortgage, property taxes, homeowners association dues/fines, mechanics liens (for improvements so similar to loan against home), etc.

IMO, if there is a foreclosure, the 1st lienholder would be paid, then the 2nd.  I'm not sure Uncle Sam would get any, especially now that you have BK'd and walked from the home.  The only thing Uncle Sam could get is "EQUITY" but according to you, there is none, and if you BK'd I doubt you even own the home in title are essentially a renter.

What state are you in?    Does it have homestead or homeowner exemptions?  How did the Federal Government get a tax lien against your primary residence?  Does the deed still reside in your name or did the lenders ever execute a transfer of title due to BK through some type of foreclosure or sale or quit claim or anything?

[Anonymous]

The IRS was pursuing me to pay this tax from a failed business. At the time I was unemployed and so they marked it as uncollectable according to the auditor.  But in doing so I guess they decided to put a lien on my house, so that if I ever sold it, at least they may get something? This conversation with the IRS occurred after my bk discharge 1/3/08 because I was told I could not include them in the bk.

I live in Colorado.  I have never felt very comfortable with this whole mortgage thing since the bk.  When we filed, our attorney recommended that we include both the 1st and 2nd in the bk and NOT to reaffirm either one.  We received letters from both banks giving us the opportunity to reaffirm, which we declined.  During the time between the filing and the discharge, we continued making the mortgage payments every month.  The only thing that changed is they no longer would mail us statements, nor could we pay online.  So we just had to remember to pay them on time.  After the discharge, we started receiving statements from the 1st, but still do not receive statements from the 2nd.  We can now pay online with both again.  We never received anything else from the mortgage companies indicating any change or transfer of title or deed.  So as far as I know, I am still on the deed. (I purchased the home in my name only, before my dh and I married 13 years ago). 

I've tried to question how I was able to discharge the debt to these two banks and yet still remain on the deed?  My attorney basically said that as long as we made the payments, the banks would not evict us nor foreclose.  It seemed like a good deal for us, but now that I've decided to really work on cleaning up my credit report, I wonder.  The 1st is showing up on my credit report and does NOT have the chpt7 bk notation, and is showing all payments paid on time and no lates.  The 2nd does have the chpt7 bk notation and also is showing all payments paid on time. 

In reality, neither one of these loans really exist anymore and I've been told that if we do default that it can not show up on my CR because they don't really exist. Since dh hasn't made a payment on the 2nd since August and the fact it is still showing payments made on time, I am now questioning his thought process on this whole thiing.

I'm so confused now.....but I'm thinking of trying to sell the house, just to get these things behind me and start fresh.  But I also think we may have a good thing going here, I just don't understand why these 2 banks are going along with this and I can't get anyone at the banks to talk to me about it.  It's almost like they don't know what to tell me.

[Anonymous]

A couple of points.

1.  The original obligation of debt on the 1st and 2nd mortgages has been discharged.  You have no legal liability to pay them.  But in doing so, you can be foreclosed/evicted because the discharge was of debt responsibility, not of the lien on the home.

2.  While you have no obligation on the original loans, you are free to enter into new agreements post BK.  In light of current economic and housing circumtances, you may find that the lien holders are willing to work with you since they would rather get some type of payment rather than add one more home to their ever growing inventory of foreclosures.

3.  Currently, it appears that in a foreclosure, there could be enough equity to satisfy the entire 1st, plus a large percentage of the 2nd.  However, that is based upon a "sale" not a foreclosure liquidation.  If you were to default on the 1st mortgage, they would foreclose.  The sale proceeds would go toward that loan.  Quite often the lienholder is the buyer for the amount of the loan.  If that were to occur, the 2nd would be out of luck and get nothing.  In order for the 2nd to protect their interest, they would have to satisfy the 1st (paying it off) and then holding the home for sale.  But usually lenders don't want to do that in this climate.  They all ready loaned you almost 100K...so it is doubtful they would drop another nearly $100k to the 1st lienholder.

4.  Colorado has homestead exemptions.  The IRS cannot foreclose the home, but if it is sold and you gain net equity proceeds, they could pursue against the proceeds.  One way to avoid that is possibly through a 1031 exchange, which is when one property is sold and another is purchased to "replace" it.  It is not considered a sale, it is considered an exchange and is not taxable and is the way investors move investments, including capital gains, from property to property.

5.  Based upon my comments in #3 above, your husband is partially correct, that you don't have to pay it.  But since the 1st is less than $100k on a $180k home, there is a chance that since there is significant equity above the 1st lien, they stand a good chance of recouping a significant portion of the loan if the home sold for anywhere in the neighborhood of $150-180k.

6.  I do not agree that Uncle Sam would get paid first.  Uncle Sam would only have claim against "free and clear equity" that you are entitled to.  They would not be able to take a 1st lienholder postition in front of the lenders.  Only net amounts after the 2nd mortgage would be entitled for the IRS to pursue.  If this were property taxes, or if you had incurred the tax lien prior to the mortgages (ie: you owned the home free and clear, incurred a lien, then got the mortgage) would the IRS 'possibly' have a 1st position.

7.  Not paying the 2nd probably won't have an immediate reaction.  But it is a calculated risk.  You need to have a plan.  If they do foreclose, what is your plan?  Will it cost less to rent than make the payments?  Can you settle for less than the original loan? 

I have a friend whom the bank substantially reduced the principle and interest on the loan in order to get him to start making payments again.  Now he had not gone BK, he had left the home and been attempting a short sale.  But after a year of no serious offers/buyers, the lender decided they would rather reduce the principle and interest and start the payments than to hold the property (was CountryWide originally).

8.  In order for the deed to be transferred out of your name, you must either quit claim or the lender must foreclose and receive a trustee's deed.  Once a deed is in a name, there must be some transfer of deed to change that.  Since you made payments, even though not obligated, the lender left well enough alone for now.

9.  By all means, continue to pay the 1st.  You have to live somewhere anyway.  If you can't afford the 2nd, then you will have to take the calculated risk. 

10.  One thing to consider is that the home may be worth more in a few years than it is now.  While you say it is worth around $180k in today's market, what will it be worth in 3-5 years?  This may represent equity down the road....and Colorado does have homestead exemption and protection of equity (I think up to $45k).  The exemption is for equity, not including the underlying loans.  http://law.findlaw.com/state-laws/homestead/colorado/

Good luck!

[Anonymous]

Wow!! Thank you so much for the information. I know it must have taken you some time to reply.  I do appreciate it.  It gives me another perspective on the situation.  I honestly had not thought to pursue financing again, but that may be a terrific option.  I do love my home and would hate to loose it.  Before the economy went in the tank, the last appraisal we had on the house was $245,000 about 3 years ago.  So if I could just ride out this economic crises we seem to be in, maybe history will repeat itself and the home values start back on the rise.

I'll discuss this with dh and we'll need to have a plan depending on what we decide to do.  Thank you again for your input!

[Anonymous]

If I had been your attorney, I would have suggested you seek a reaffirmation with reduced principle/interest or better terms in some way if you love the home and wanted to keep it.  To just include it with no plan, IMO, was not the best legal service.  You could still have included, but at least explored the options.  That was probably your best point of leverage.  But right now isn't too bad either with the 2nd.

But, even without the reaffirmation, you can attempt to negotiate some type of new agreement, potentially with better APR, maybe reduced principle, or other incentives that keep you in the home, keep you on the deed (giving you future equity) and allowing you to protect your home value from the IRS through homestead exemption.

I'm not sure what your original APR rates were, but even if the principle amounts were not lowered, but you got say 4 to 4.5% APR with a waiver of past penalties, etc....you may be looking at a good deal where you have a home worth at least as much as owed. 

If you had the ability to refinanced into a single 1st, you might be able to get the second to agree to a reduced "cash out" settlement.  So if the original amount was $95,000, maybe they accept $50,000 cash in a refinance....if you can secure one with a new 1st at rates that work.