topic Re: Forced Foreclosure Due to Secondary Lien in Bankruptcy

Forced Foreclosure Due to Secondary Lien

Anonymous — Wed, 24 Mar 2021 17:52:56 GMT

Hello All,

This is more of a hypothetical, but it is likely a situation I will be in in the near future.

I have defaulted on an SBA Loan, with the SBA holding a secondary Lien on my home.

I intend to file Personal Chapter 7 to discharge the SBA debts, as well as another 60K in Personal loans and credit cards (both personal and business).

The home is about the only thing of value that they can take, and right now their lien is worth about $70,000. I know this is an assumption, but I think it is likely they will call in the lien, force the foreclosure, and sell the house.

My main question if they go this route is, can my wife buy the house before we are forced out? My wife's financials are completely separate, nothing that I will be defaulting on will affect her. I know that foreclosure will take a few months, so during those months, could my wife call the bank and simply say that she is interested in buying the house, make a reasonable offer, and get a mortgage loan. She has the means to get a conventional mortgage, so we will be looking for houses either way.

Re: Forced Foreclosure Due to Secondary Lien

Horseshoez — Wed, 24 Mar 2021 19:25:46 GMT

@Anonymous wrote:
Hello All,

This is more of a hypothetical, but it is likely a situation I will be in in the near future.

I have defaulted on an SBA Loan, with the SBA holding a secondary Lien on my home.

I intend to file Personal Chapter 7 to discharge the SBA debts, as well as another 60K in Personal loans and credit cards (both personal and business).

The home is about the only thing of value that they can take, and right now their lien is worth about $70,000. I know this is an assumption, but I think it is likely they will call in the lien, force the foreclosure, and sell the house.

My main question if they go this route is, can my wife buy the house before we are forced out? My wife's financials are completely separate, nothing that I will be defaulting on will affect her. I know that foreclosure will take a few months, so during those months, could my wife call the bank and simply say that she is interested in buying the house, make a reasonable offer, and get a mortgage loan. She has the means to get a conventional mortgage, so we will be looking for houses either way.

I'm thinking a talk with a bankruptcy attorney is definitely in order, however, I'm concerned by the prospect of that lien. At this point, my gut tells me even a Chapter 13 will not help you avoid paying the $70,000 as the lien is already in force (assuming I read what you wrote correctly). Had you filed for Chapter 7 before the lien was put in place, you might have been able to avoid paying it.

FWIW, my wife filed for a Chapter 7 while we were separated back in 2014 and she was able to have her SBA loan discharged in that manner; I don't know what would have happened if we'd still had our house.

Re: Forced Foreclosure Due to Secondary Lien

Anonymous — Wed, 24 Mar 2021 21:06:09 GMT

Thanks for the reply.

The lawyers I've met with have all told me to surrender the home, due to the amounts owed being much higher than the value of the secondary lien. So I won't be paying anything regarding that 70k. The bank will simply take the house, sell it, and kee what's left over after paying off the primary lien.

Chapter 13 is out, as my total debts are like $800,000. So no chance paying those in 3-5 years.

my main question is whether my wife can buy the house, while it's going through foreclosure. Then we don't have to move, and we like where we are. But no one seems to know the answer yet. I'll just wait to talk to whatever attorney I hire when I'm ready to file the chapter 7 next year.

@Horseshoez wrote:
@Anonymous wrote:
Hello All,

This is more of a hypothetical, but it is likely a situation I will be in in the near future.

I have defaulted on an SBA Loan, with the SBA holding a secondary Lien on my home.

I intend to file Personal Chapter 7 to discharge the SBA debts, as well as another 60K in Personal loans and credit cards (both personal and business).

The home is about the only thing of value that they can take, and right now their lien is worth about $70,000. I know this is an assumption, but I think it is likely they will call in the lien, force the foreclosure, and sell the house.

My main question if they go this route is, can my wife buy the house before we are forced out? My wife's financials are completely separate, nothing that I will be defaulting on will affect her. I know that foreclosure will take a few months, so during those months, could my wife call the bank and simply say that she is interested in buying the house, make a reasonable offer, and get a mortgage loan. She has the means to get a conventional mortgage, so we will be looking for houses either way.

I'm thinking a talk with a bankruptcy attorney is definitely in order, however, I'm concerned by the prospect of that lien. At this point, my gut tells me even a Chapter 13 will not help you avoid paying the $70,000 as the lien is already in force (assuming I read what you wrote correctly). Had you filed for Chapter 7 before the lien was put in place, you might have been able to avoid paying it.

FWIW, my wife filed for a Chapter 7 while we were separated back in 2014 and she was able to have her SBA loan discharged in that manner; I don't know what would have happened if we'd still had our house.

Re: Forced Foreclosure Due to Secondary Lien

Horseshoez — Wed, 24 Mar 2021 21:36:09 GMT

@Anonymous wrote:
Thanks for the reply.

The lawyers I've met with have all told me to surrender the home, due to the amounts owed being much higher than the value of the secondary lien. So I won't be paying anything regarding that70kk. The bank will simply take the house, sell it, andkeee what's left over after paying off the primary lien.

Chapter 13 is out, as my total debts are like $800,000. So no chance paying those in 3-5 years.

my main question is whether my wife can buy the house, while it's going through foreclosure. Then we don't have to move, and we like where we are. But no one seems to know the answer yet. I'll just wait to talk to whatever attorney I hire when I'm ready to file the chapter 7 next year.

Help me out, what does the $800,000 have to do with filing a Chapter 13? It is my understanding unless your "unsecured" debt exceeds $394,725.00, you can easily file for a Chapter 13; keep in mind, most Chapter 13 plans do not pay anywhere near 100% of the outstanding debt. As for your wife buying the house, that is by no means a lock, even if she doesn't file. I suppose if you find an attorney who does some creative lawyering, and if the statutes in your area allow it, she might be able to pull it off, but I certainly wouldn't plan on it without assurances from an attorney.

Re: Forced Foreclosure Due to Secondary Lien

despritfreya — Thu, 25 Mar 2021 01:42:02 GMT

@Anonymous wrote:
The lawyers I've met with have all told me to surrender the home, due to the amounts owed being much higher than the value of the secondary lien. So I won't be paying anything regarding that 70k. The bank will simply take the house, sell it, and kee what's left over after paying off the primary lien. Chapter 13 is out, as my total debts are like $800,000. So no chance paying those in 3-5 years. My main question is whether my wife can buy the house, while it's going through foreclosure. Then we don't have to move, and we like where we are. But no one seems to know the answer yet. I'll just wait to talk to whatever attorney I hire when I'm ready to file the chapter 7 next year.

Three comments:

1. The SBA (or the Bank which holds the SBA backed loan) cannot sell the house to your wife until it is the titled owner. It won’t become the titled owner unless and until it completes a foreclosure of the home, or you do a “deed in lieu”. Once the SBA (or the Bank) is the owner of the property anyone can approach the owner with an offer. Don’t know if an offer will be accepted.

2. The real question is “can my wife bid on the property at the foreclosure”? I do not know. Such may depend upon state law as to whether or not a non-borrower who is related to the borrower can buy the property at a foreclosure.

3. If you have not already done so, I urge you to discuss with a qualified attorney what a Chapter 11 Subchapter V can do for you - if you qualify for it. In the Subchapter V case, if the second mortgage is business related you can do a cram-down (cram the secured claim down to the value that supports the lien). This type of cram-down is not allowed in a Chapter 7, Chapter 13 or “regular” Chapter 11 when dealing with the debtor's primary residence. It is only allowed in a Subchapter V Chapter 11 (and a Chapter 12).

Des.

Re: Forced Foreclosure Due to Secondary Lien

Horseshoez — Thu, 25 Mar 2021 01:45:09 GMT

Thanks @despritfreya, I was thinking (hoping?) you'd show up here and offer some insights with your usual clarity.

Re: Forced Foreclosure Due to Secondary Lien

Anonymous — Thu, 25 Mar 2021 01:49:29 GMT

I am not 100% sure on chapter 13's, but my point with the 800k is that I owe a significant amount of debt. And unless the chapter 13 only pays back 10%, there would be no point in doing it anyway. As the only thing I lose in chapter 7 is the house.

Re: Forced Foreclosure Due to Secondary Lien

Anonymous — Thu, 25 Mar 2021 01:53:12 GMT

Thanks for the reply.

I think we're pretty much on the same page. Once the foreclosure is completed, the deed goes to the bank. At that time, theoretically, my wife could put an offer on the property. What I don't know is when in that process that deed is transferred. I know we can stay in the house for several months after the foreclosure is complete (or the process is started?). So does the deed transfer before we are physically out of the house?

I've read about subchapter V but I am not sure how it would help me. We are not filing a restructuring as a business, in fact the business has shut down and been dissolved. Unless V would be like a crammed down version of a personal chapter 11, with a HUGE discount of what I would have to pay back.

Re: Forced Foreclosure Due to Secondary Lien

Horseshoez — Thu, 25 Mar 2021 02:16:29 GMT

@Anonymous wrote:
I am not 100% sure on chapter 13's, but my point with the 800k is that I owe a significant amount of debt. And unless the chapter 13 only pays back 10%, there would be no point in doing it anyway. As the only thing I lose in chapter 7 is the house.

Many Chapter 13s pay 10% or less, mine was 9.8%.

Re: Forced Foreclosure Due to Secondary Lien

despritfreya — Thu, 25 Mar 2021 11:39:14 GMT

@Horseshoez wrote:
Thanks @despritfreya, I was thinking (hoping?) you'd show up here and offer some insights with your usual clarity.

My pleasure. Hope my comments help in some way.

Des.

Re: Forced Foreclosure Due to Secondary Lien

Anonymous — Thu, 25 Mar 2021 14:17:14 GMT

Interesting.

I did not realize that the Chapter 13 could be that much of a discount. Neither of the 2 attorneys I talked to even brought up CH 13.

Re: Forced Foreclosure Due to Secondary Lien

despritfreya — Thu, 25 Mar 2021 15:06:17 GMT

@Anonymous wrote:
I've read about subchapter V but I am not sure how it would help me. We are not filing a restructuring as a business, in fact the business has shut down and been dissolved. Unless V would be like a crammed down version of a personal chapter 11, with a HUGE discount of what I would have to pay back.

This is why you need to discuss with a well qualified attorney. I have worked at least 2 Subchapter V cases where my clients were wage earners at the time the cases were filed but, due to failed businesses, more than 50% of total debt was business related. Here is the argument in one of those cases:

"The United States Trustee ("UST") asserts that these Debtors are not eligible to elect to proceed under Subchapter V for two reasons. The first reason asserts that they are not engaged in commercial or business activities as provided for under 11 U.S.C. § 101 (51D). . .

The Debtors are "engaged" in commercial or business activities. 11 U.S.C. §101 (51 D) defines a small business debtor as "a person engaged in commercial or business activities ... " and should include those who are no longer so engaged but are dealing with resolving business related debt.

As pointed out by the UST, the Debtors hold interests in numerous entities as described on Schedule B and as reported in the various Periodic Reports. As further described on Schedule F and the various claims filed in this case, the obligations associated with the operation of a business exceed $1,135,958.00 which is in excess of 90% of all scheduled debt. But for the potential winding down of one LLC, the Debtors do not currently operate any of the various entities. This, however, is a distinction without merit as there can be no doubt that they are engaged in business. They are working to resolve their business debt through this bankruptcy proceeding. . .

For arguments sake let's look further at the concerns of the UST. The UST's position is that unless the debtor is actively or currently engaged in business, the debtor does not qualify for the Subchapter V election. This simply is not correct. While the UST references the decision in In re Wright, 2020 WL 2193240 (Bankr. D. SC 2020) as an anomaly, the facts in that decision, . . . match the facts in this case. In Wright, the debtor controlled at least two inactive entities. The debtor's income came from a source other than operating his own business. The debtor elected to proceed under Subchapter V. The UST objected to the election asserting that "the debtor is not an individual engaged in commercial or business activities" and therefor not eligible to take the election. The court did not agree.

'The SBRA and Subchapter V were designed to broaden relief available to address small business debt. Although the brief legislative history of the SBRA indicates it was intended to improve the ability of small businesses to reorganize and ultimately remain in business, nothing therein, or in the language of the definition of a small business debtor, limits application to debtors currently engaged in business or commercial activities.' id. at Pages 4-5".

In both cases the Court ruled in favor of the debtor. Whether or not a Subchapter V will work for you is something you need to explore. Your District may have a different opinion as it relates to being "engaged in business".

As to what you would pay back to unsecured creditors, a Subchapter V is similar to a Chapter 13. In general, you pay what you can afford over a 36 to 60 month period.

Please explore this potential option.

Des.

Re: Forced Foreclosure Due to Secondary Lien

sccredit — Thu, 25 Mar 2021 15:26:06 GMT

Please listen to Des. I dealt with similar in a BK because of a failed business and my attorney never brought up a 13 or 11. Our home was sold by the trustee. If I chose a different attorney I may have been able to keep the home. It is worth the time to meet with multiple attorneys and find one qualified. Normal BK attorneys are not equipped to deal with complicated situations. In CA there is a BAR designation for Certified Bankruptcy Specialists. That may be a sign they know what their doing.

Re: Forced Foreclosure Due to Secondary Lien

Anonymous — Mon, 29 Mar 2021 14:27:45 GMT

Des,

Thank you for taking the time.

I did reach out to an attorney who said I am a good candidate for Subchapter V, if my goal is to keep the home. So I think this is the right path.

They did not give me a ton of info, like I was trying to figure out if Subchaper V had a minimum payment toward creditors, i.e does the value of the lien on the home have to atleast be paid in the 60 months, or if my disposable income is too low that the creditors or trustee can decline the Subchaptwer V and force a Chapter 7 liquidation, etc. But I understand, as I need to retain them first.

It will take a few months to save up for the retainer, but I will very likely go this route.

Thanks Again

Re: Forced Foreclosure Due to Secondary Lien

despritfreya — Tue, 30 Mar 2021 00:59:11 GMT

@Anonymous wrote:I did reach out to an attorney who said I am a good candidate for Subchapter V, if my goal is to keep the home. . .They did not give me a ton of info, like I was trying to figure out if Subchaper V had a minimum payment toward creditors, i.e does the value of the lien on the home have to atleast be paid in the 60 months, or if my disposable income is too low that the creditors or trustee can decline the Subchaptwer V and force a Chapter 7 liquidation, etc. But I understand, as I need to retain them first. It will take a few months to save up for the retainer, but I will very likely go this route.

You ask a lot of good questions.

The one I marked in blue is one I do not know the answer to. In a Chapter 13 you must pay the secured claim in equal monthly installments over the life of the Plan. I do not find a provision in Subchapter V that contains the same language but, I suspect that 60 months is the most you will have. Depending upon the amount of the "secured" portion of the claim, this just may not be financially possible.

As to your disposable income, you will be preparing a proforma that will anticipate your ability to pay over the 3 to 5 years. Your narrative associated with this document will explain how and why you believe you can make the required payments. Your attorney will work with you on this and, depending on the situation, may suggest working with an accounting professional. Just like in a Chapter 13, you must pay the unsecured creditors at least what they would have gotten if you had filed Chapter 7. This is called, meeting Chapter 7 Reconciliation. If you have no non-exempt assets, in theory, you can pay them $0 but don't count on it.

In a Subchapter V creditors do get to vote but voting has no real impact. The Subchapter V Trustee's job is to mediate between the debtor and creditors in an effort to get a "consensual" plan - meaning all "yes" votes and/or resolving any objections. If the Plan is "non-consensual", so long as it is "fair and equitable" (something the judge will determine), you can still confirm the Plan. In a "non-consensual" plan, the Subchapter V Trustee remains in place and, just like in a Chapter 13, you make the monthly payment to him/her and he/she pays the creditors. The big difference between consensual and non-consensual is twofold as it relates to non-consensual: 1) The Trustee will continue to run up a bill as he/she remains the Trustee in a non-consensual plan and 2) you will not get a Discharge until the Plan is completed (just like a Chapter 13).

Just remember, because this is a relatively new process, your attorney may not have all the answers. Case law, over time, will determine exactly how the process will work. Personally, I like the Subchapter V Chapter 11 and, to date my experience is that it is/has been a good option for a number of my clients.

Des.

Re: Forced Foreclosure Due to Secondary Lien

Anonymous — Tue, 30 Mar 2021 01:21:06 GMT

thank you again for the responses. You are going above and beyond.

again, I know they aren't going to give me a ton of info before the retainer, but the main sticking point was to figure out the disposable income.

Maybe you can help me with one thing in to ur response...

Just like in a Chapter 13, you must pay the unsecured creditors at least what they would have gotten if you had filed Chapter 7. This is called, meeting Chapter 7 Reconciliation. If you have no non-exempt assets, in theory, you can pay them $0 but don't count on it.

i was wondering about how this works with the "rejection" of the subchapter V and forced chapter 7. So in my case, the only asset I have is my home. Which the bank, secured creditor, has the 2nd lien on, that 2nd lien right now is worth about 60k. So do the repayments need to be at least 60k over the 5 years?

why would the bank even allow me to do subchapter V if it didn't receive at least that much? Or even if they reject it, it can still go through with the trustee if it is "fair"?

Basically, in my mind, from the math I've done, my disposable income would be around $700/month since my wife's income is included. So if the only asset I have is the home, with the 2nd lien by the bank being valued at 60k, would the ubchapter v even go through.

aorry for being long winded

Re: Forced Foreclosure Due to Secondary Lien

despritfreya — Tue, 30 Mar 2021 12:11:35 GMT

This is why you look into the Subchapter V. It does not necessarily mean it will work. $700/mo for 60 months only produces $42,000.00. If you are limited to 60 months (as opposed to being able to recast the secured claim as a long-term loan like a mortgage), funding would be inadequate to make it work. Remember, it’s not just the secured claim. You also have to pay your attorney’s legal fees, the Subchapter V legal fees, interest at the “Till Rate” on the secured claim and whatever else needs to be paid in the 60 months, such as taxes if you owe any and something to everyone else.

But. . . this is a 5-year proposition. What will your income be a year from now, 2 years from now? Will you be able to get raises or a better paying job? Will you be able to increase the Plan payment in, say, year 3? These are the issues to think about in preparing the proforma.

Don’t dwell on this too much. I believe you had already set your mind to walking from the home. Subchapter V is just another tool in the tool box in an effort to keep the home. If the numbers simply don’t work then so be it.

Oh. . . one last point. You asked about the bank letting this go through. Keep this in mind. . . The bank does not want your home. It wants to be paid. Everything is a negotiation. In the end, if the parties cannot agree to something, you walk away. You will get another home at some point. While this is easy for me to say and maybe tough for you to agree with, the house you currently have is not your only chance at having a home. A home is what you make it. It does not need to be this particular house.

Des.