Chapter 13 can save an investment property – Lien stripping in action

26 Feb Chapter 13 can save an investment property – Lien stripping in action

Today, a Wisconsin client asked what we could do to help save his investment property. It’s worth only about $70,000. It has a first mortgage for $80,000 and a second mortgage for $30,000. Our client bought the property at the top of the market. He can afford the first mortgage, but not the second. And he certainly doesn’t want a short sale or a deficiency judgment. He makes enough money that he could afford to pay it. What can be done?

Our client has little other unsecured debt.

But the entire second mortgage really is unsecured – there’s no equity in the building to support it. So in chapter 13, we can treat that debt as unsecured and strip away the second mortgage. Instead of paying 11% interest on the second mortgage, our client can pay it off in full over a period of five years – and he could afford to do that. Not only that, but $10,000 of the first mortgage can also be treated as unsecured and paid off in full over 5 years – without interest. That’s because it is perfectly OK to modify a non-residential mortgage loan in chapter 13 even though you can’t modify a mortgage loan secured by your personal residence. Wasn’t that a smart idea of Congress to reject mortgage modification? Gee, we really could have made some progress with our mortgage crisis.

Anyway, our client will be able to keep his building, reduce the mortgage considerably, pay off his debts over a reasonable period of time without interest and get the second mortgage lien released, thanks to the creative use of chapter 13.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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