Most of the time, people with underwater mortgages want to know what their options are before they file Las Vegas bankruptcy. They usually receive the list: short sales, offering the deed-in-lieu of foreclosure, refinancing, bankruptcy, etc. However, people who have already filed chapter 7 bankruptcy find that they still have to pay on the mortgage lest the lender foreclose on their property. The problem is that a chapter 7 filing discharges a mortgage, but it doesn’t strip the lien. The lender may not be able to sue the debtor in court for a default, but it can recover the house. The benefit of the discharge only goes so far.
This doesn’t mean the lender doesn’t benefit if the debtor stays in the home. The property’s value might improve, which would make the lien more valuable, and if the debtor pays down superior mortgages, the position of the discharged one improves. Even unpaid interest is just more money for the creditor. Clearly, the debtor has a good reason to get the lien removed, but what options are there?
- The most common response is to strip the lien in chapter 13. The so-called “chapter 20” bankruptcy, which means the debtor files in chapter 7 and then in chapter 13 (adding up to 20) to eliminate secondary mortgages encumbering the property, is very popular in bankruptcy circles.
- The other option is for the debtor homeowner to buy off the lender. Sometimes settlements on discharged, underwater inferior mortgages can go for pennies on the dollar. And why shouldn’t they? If the debtor walks away from the home, or allows the lender to foreclose on it, the lender ends up owning a property with superior liens on it, which means it’s likely to lose the property just as quickly as it gets it. The lien is literally the only reason it has to stick around.
The biggest benefit of filing chapter 7 before dealing with the junior lien-holder is that any canceled loan sum will not be counted as income the way a mortgage deficiency would be in a short sale. Rather than settling on the mortgage, what homeowners in these circumstances are doing is simply buying off the lien. As a result, no debt is canceled, so it’s a worthwhile option to consider, especially for homeowners who think it’d be cheaper than going through chapter 13 bankruptcy. It will, however, require guidance from an experienced Las Vegas bankruptcy lawyer to navigate the options.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-880-5554 to set up your free consultation.