If the mortgage on your home is defective, a chapter 7 trustee can sell the entire home even if you’re current with your payments and despite the absence of a payment default. You get any equity – and good luck with obtaining a new mortgage – but the mortgage balance goes to your general creditors which now will include the mortgage lender.
Ouch!! That certainly can hurt.
Here’s a Chapter 13 workaround. You and the chapter 13 Trustee jointly file to avoid and preserve the mortgage. A joint filing avoids questions of which one of you has the actual right to do so, and the 13 trustee’s cooperation will be required in any event.
You make the former mortgage payments to the 13 trustee for 3-5 years, paying down the amount of your home’s value that would go to the general creditors if it were sold.
At the end of your chapter 13 plan, the remaining obligation to the creditors is much less than it was when the case began. This is because there is only principal to pay down. There is no interest on that former mortgage balance. You can now (hopefully) refinance.
Example: You have a $100,000 mortgage on a $100,000 home. The mortgage is defective for whatever reason – unrecorded, bad notary, etc. Your general creditors are entitled to a $90,000 dividend. (It is $90,000 and not the full $100,000 because we can deduct the hypothetical 7 trustee fees when calculating a general creditor dividend.
Your regular mortgage payment was $1,000/month. You pay that same $1,000 monthly to the 13 trustee through your plan. At end of a 60 month plan, your general creditors are still owed $30,000. ($60,000 has been paid, $90,000 was the total dividend assuming 10% was the hypothetical 7 trustee’s fees.) You refinance your $100,000 home for a $30,000 new mortgage and pay off the remaining balance owed to your general creditors.
That is a home run.
You will have to pay your creditors the value of any unprotected equity in addition to the defective mortgage’s balance. It is still a great deal.
If your home is underwater, then the dividend to your creditors is even less than mortgage balance. The amount owed to your creditors cannot exceed the value of your home, no matter how large the mortgage balance was.
You might get some pushback from the 13 tee on using a $10,000 hypothetical chapter 7 trustee deduction from the dividend. Negotiate or fight, your call. The worst case is a $44,000 refinance instead of $30,000. ($60,000 plan payments, $6,000 13 tee commission, and $56,000 paid to the creditors leaving $44,000 still owed if all trustee fees are disregarded in this worst case scenario.
Chapter 11 is another alternative, with a 100+ month plan. No chapter 13 tee to pay but the US Trustee and greater atty fees to pay.
Kudos to VT 13 Trustee Jan Sensenich, whose article was published at www.considerchapter13.org (subscription $275/year).
Jed Berliner, Lawyer
I help families in debt by defending credit card suits, suing debt collectors, making student loan payments affordable, defending against foreclosures, and filing for bankruptcy protections.
BerlinerLaw, 95 State Street, Suite 1010, Springfield, MA 01103-2081, (413) 788-9877
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Last modified: March 27, 2013