Semi-technical Chapter 13 question on lien stripping

[Eric the Red]

I'm hoping that someone that has been through this or is knowledgeable about the process can answer a couple questions. I have been doing tons of research on doing a Chapter 13 in order to strip my 2nd mortgage and these are a few things I think I've learned:

A lien strip and a discharge on the second are NOT the same thing. The loan will be discharged upon completion of the Chapter 13 payment plan, but the lien will remain unless it is avoided (aka: stripped, crammed down). That means that if, anytime in the future, my house was to ever recover in value past the amount of my first mortgage, the lender on the second mortgage that was discharged could initiate a foreclosure to recoup the unpaid money.

So my first question is, what is the actual process for getting the lien stripped/avoided?

The second thing I have learned that creates even more questions: According to the means test on Form 22C, I have a negative disposable monthly income (I haven't filled out the Schedules yet). I have no secured debt (other than my first mortgage) and no priority claims. In fact, my second mortgage is the only debt I will be doing anything about in the Chapter 13. I have no credit card debt or anything else.

So my second question is, since I have a negative DMI and only the one unsecured debt, can I submit a plan where I pay nothing or will I still have to make some sort of payment? Do trustees ever confirm plans where absolutely no payments are made to unsecured creditors?

Thanks in advance for any help.

[Social Apocalypse]

Originally Posted by Eric the Red

I'm hoping that someone that has been through this or is knowledgeable about the process can answer a couple questions. I have been doing tons of research on doing a Chapter 13 in order to strip my 2nd mortgage and these are a few things I think I've learned:

A lien strip and a discharge on the second are NOT the same thing. The loan will be discharged upon completion of the Chapter 13 payment plan, but the lien will remain unless it is avoided (aka: stripped, crammed down). That means that if, anytime in the future, my house was to ever recover in value past the amount of my first mortgage, the lender on the second mortgage that was discharged could initiate a foreclosure to recoup the unpaid money.

So my first question is, what is the actual process for getting the lien stripped/avoided?

The second thing I have learned that creates even more questions: According to the means test on Form 22C, I have a negative disposable monthly income (I haven't filled out the Schedules yet). I have no secured debt (other than my first mortgage) and no priority claims. In fact, my second mortgage is the only debt I will be doing anything about in the Chapter 13. I have no credit card debt or anything else.

So my second question is, since I have a negative DMI and only the one unsecured debt, can I submit a plan where I pay nothing or will I still have to make some sort of payment? Do trustees ever confirm plans where absolutely no payments are made to unsecured creditors?

Thanks in advance for any help.

Hi there;
I'm no attorney, but spent a lot of time with them. I am in Washington State, and this is STATE law, so you'll have to check yours, but generally I believe:
"Discharging" the second will only occur AFTER the lien is stripped, and can ONLY be done in a Ch 13 (so far). In order for the lien to be stripped, you must not have ONE DOLLAR of equity in your home beyond what you currently owe on your FIRST mortgage, or the second remains secured by your home and it is NOT discharged.

Also, if you have NO residual income after the means test, you will not be ABLE to do a Ch 13. I think you have to have at least $100 of unattached income AFTER you pay all of your bills. If not, you must file Ch 7. You cannot strip your 2nd in a ch 7 (YET-but stand by for changes if they get the Cram Down Bill through congress!)

If you have NO other debt other than your mortgages, I would consider a different option other than bankruptcy. You would probably do MUCH better getting modification done, or negotiate some sort of other solution directly with your lenders.

Good luck, and make sure you DO get legal advice, because there are LOTS of opinions out there, but the one that matters is the JUDGE'S!! This is not a good "do it yourself" project, even though some might tell you it is. A local attorney KNOWS the judges who will decide (and the trustees) and they have a GOOD IDEA how they rule on things. You need this insight.

[Eric the Red]

Hi TB, thanks for the reply.

Based on what you're saying, I think things may be different in WA versus CA. You can have a loan discharged without having the lien avoided (i.e. removed). The discharge means you are no longer personally liable for the debt so the lender cannot come after you for payment, but if the lien remains then the lender can pursue their rights against the property and still foreclose. In my case, where I am about $250K upside-down and the second is $103K, the lender wouldn't do that until it became beneficial - say in ten (or 20) years when the house was no longer upside-down. If the lien still existed they would then foreclose and get their money after the sale.

Also, in CA (and actually I think this is federal law), there is nothing in the code that prevents a Chapter 13 when you have a negative disposable monthly income (DMI). You first have to calculate whether or not you are a below or above median income debtor. If you are an above, then the law states that the "means test" governs your DMI. The law also states that ALL of your DMI must be payed to unsecured creditors (In a Chapter 13, since they must generally be paid in full, your secured and priority debts are considered expense deductions when you are calculating your DMI). There are several case laws in various federal districts that support a debtor having a negative DMI and thus being able to choose on their own how much they want to pay. Where some of the case law differs is whether a debtor with negative DMI must be bound by the 60 month payment plan time limit. In the 9th District (which includes CA,OR, WA, MT, NV, ID, AZ) the answer is no, they are actually free to choose their own plan length.

What I was asking in my original post was what is the actual legal process for getting the lien stripped. Since the post, I've discovered the answer. You must file a motion simply stating that you intend to avoid the lien on the property by showing that valuation is below what is secured by the senior lien(s). The lender gets served with the notice of the motion and has a chance to reply on whether or not they are going to object. If they are, then there will be a hearing. In my case, I doubt they would even object because it is so obvious. If they don't, there is no hearing and the judge grants the motion and orders the lender to issue a reconveyance, assuming I complete the payment plan.

Now, I still don't have an answer to my second question. I know that I can technically have no payment with the negative DMI. What typically happens in this case is the debtor will have a nominal ($100) payment for plan, 90% of which is going to attorney's fees and the other 10% is the trustees' administrative fees. So unsecured creditors are still getting 0%. This is done (or so I was told) because "in a Chapter 13 there should be some type of payment plan".

What I want to know is has anyone filed on their own (pro se), with negative DMI, and had a plan confirmed that paid nothing?

[auroraproblem]

I just left an attorney last week and we are going the Chapter 13 lien strip method in Washington state.

These are the things that he has stated:

1) Discharging a lien is not what you believe, it means that you have listed it as non reaffirming the loan and therefore at the end of discharge you are not responsible for the amount owed. They still hold the lien, can still exercise their rights to foreclose (though obviously as you pointed out they are unlikely to do that for some time). There is no such thing as discharging a secured debtor, just removing your personal liability for the amount owed in exchange for them obtaining the secured property.

2) In the case above, there are time limits by state on how long the lien can reside on the property inactive (something you will want to check into further).

3) You will want an attorney to file the petition to remove the lien, if you do it personally, almost surely they will contest the value if nothing else to hold their position longer, convinced that you may not desire the costs or time to fully engage them. Will not cost you much, as it is not costing us much to have a lawyer handle this.

4) You will have to pay something back in the Chapter 13, we had considered a 7 followed by a 13 after property values drop further if the lien strip is contested and fails (our value is within 10k). Our attorney was clear on this though, in that case you must not have any available funds or the unsecured (after lien strip) debt would have to see payment of some type (not 100% unless you have above a certain amount of available funds in the year). Our lawyer stated this can be difficult because his fees are only calculated in on a payment plan, but may be difficult to be the payment plan. You will also have to be in 36 months minimum (if you are below median income), there is no way around that, anything else constitutes an early discharge and may only be done by the judge not just because you have saved up enough to get yourself out. Things like unemployment, death, etc...may constitute reasons for early discharge (I believe they make a comparison for the creditors as to what they would have received in a Chapter 7 as a test).

Anyway, hope some of this helps. Don't think CA is any different as they are 9th district as well. We have begun our journey down this path and have already filed the petition for the lien strip. Will be posting on the board with the results of that when we have it (to another thread though).

[MyHAMP]

Originally Posted by auroraproblem

I just left an attorney last week and we are going the Chapter 13 lien strip method in Washington state.

These are the things that he has stated:

1) Discharging a lien is not what you believe, it means that you have listed it as non reaffirming the loan and therefore at the end of discharge you are not responsible for the amount owed. They still hold the lien, can still exercise their rights to foreclose (though obviously as you pointed out they are unlikely to do that for some time). There is no such thing as discharging a secured debtor, just removing your personal liability for the amount owed in exchange for them obtaining the secured property.

Now this is Chapter 7, right?


When it comes to the stripping, I don't even think State Law applies. Second, if you are stripping a second lien in CH13, the "underwater" second lien will be turned into unsecured debt and treated as such.
If you successfully complete your CH13, BOTH is gone: The lien AND your personal liability. But I'm sure you are aware of that.