After chapter 7 bankruptcy, I often advise my clients, just don’t pay the second mortgage.
Now, if you don’t file bankruptcy and stop paying the second mortgage, two things would happen. they will call you day and night; and eventually they would sue you and garnish you. Bankruptcy keeps them from doing either of those.
Will they foreclose you? That’s the big question–but the answer is clear. The second mortgage can sell your house at foreclosure only if they pay off the first mortgage. If the value of your house has dropped below what you owe on the first. that’s just a way for them to lose more money. They are not going to do that.
What are they going to do? They will wait patiently for you to keep paying the first, and hope the value comes back up (and the balance on the first drops) that at some point you have equity that they can grab.
So, if you follow this just-don’t-pay-the-second strategy, you know you will never have any equity in your house. If you go to sell five years or twenty years down the road, the second will still be sitting there. (With five or twenty years of interest and late fees.)
So when does this make sense? Suppose you have five more years before your youngest is out of high school. Once that’s done, you might want to move to a smaller place anyway. Then you can stop paying the first mortgage too, and move out. The bankruptcy still protects you from both of the mortgages. (You’d have to keep paying the HOA until the first mortgage forecloses.)
Does this strategy hurt your credit? It does and it doesn’t. It doesn’t hurt your credit score, because that second mortgage will just show bankruptcy and can’t show any late payments after that. (For my clients, we check to be sure.) But it does hurt your being able to buy again.
For loans like car loans–or interest rates on your credit cards–your credit score pretty much controls, so you’ll be able to get a care loan at a good rate. Your score will be good, if you’ve built up new, good credit.
But to get a mortgage, a different rule applies. The March 2, 2010 manual released by Fannie Mae, (link here https://www.efanniemae.com/sf/guides/ssg/sgpdf.jsp) says what you have to do to get an insured mortgage. You have to be two years after the bankruptcy (with extenuating circumstances), but you have to be three years after a foreclosure. Even though there will not be a foreclosure on your credit report, there will be one on the land records, and a mortgage lender will check there, too.
So if you follow this just-don’t-pay-the-second strategy, you keep the house for three or five or seven years; then you have to plan to rent for three years or so. Then you’d be able to buy again.
If real estate goes up a lot over the next ten years, you’d be better financially to move out of the house right after the bankruptcy, rent for three years right away, and then buy again. (If real estate stays flat, then not being able to buy for ten years doesn’t lose you anything.)
But if you want to keep your children in the same school and the same house, just-don’t-pay-the-second is a good plan.
What if you want to keep this house long term? One way to do that would be with a second mortgage relief Chapter 13. See my website on that. http://virginiasecondmortgagerelief.com/
Or, you can not pay the second for a couple years, save some money, and then offer them a cash settlement. Say you owe $75,000 on the second mortgage, file chapter 7 bankruptcy, and pay them nothing for three years. If the value of your house is still less than you owe on the first, and you offer them $7000 to call it even, they might agree. If you move out, they get nothing.
That strategy takes nerves of steel. And it only works if you go for several years of not paying them–you want them to get used to getting nothing, so your offer of 10 cents on the dollar looks good. I’ve seen it work.
{ 274 comments… read them below or add one }
← Previous Comments
Fabio:
1. That’s the big question. I’d love to have an answer, too. There are five or six people on various parts of my website–and three or four of my own clients–who have been told they could do that. But then the deals all fall apart for some small reason. So I don’t know if it’s possible. I do know it’s hard.
(Maybe, I’ve been told this, you can rent out the house you are living in; and get approved for a new house that way.)
2. Don’t know either. I can say that they should be willing to do that. Are they set up to do that? Don’t know. Don’t know who your mortgage company is–but even if I did, I wouldn’t know the answer to that question. I’d say there’s no reason why you shouldn’t try.
This blog has been such a great resource but I need to clarify if I may.
I have first at 250k and second 70k and third at 8k. I am way under water on first by 20k
Without going to bk or anything could I just stop payments on 2nd and 3rd, save up the money and hope they settle with me for 5 or 10 percent and then not have to pay taxes on that? I am so confused as to what to do!
Bk or short sale or just stop paying the second and third??
Thank you do much!
Dawn:
If you stop paying the 2nd and 3rd and “without going BK or anything” the 2nd and 3rd will sue you and garnish you. They won’t settle up–at least I doubt it–they will sue. That’s why people file bankruptcy–so they can’t sue. (Also your credit report will be HORRIBLE because it will show that $78,000 in debts that you are NOT paying.)
If you do a shortsale–probably the same result. For a short time during the worst of the crisis, second mortgages would get a little from the shortsale and call it square. I almost never see that any more. They will get a little to allow the shortsale to go through, but they still keep the right to come after you for the rest. And they then do.
Bankruptcy is where that leaves you. I’m a bankruptcy lawyer, of course, so I believe in my product. Bankruptcy is the legal way to get out of debts you can’t afford to pay. Except in very unusual situations, nothing else works.
Mr. Weed,
I filed for ch7 several years ago & included my home;which has a first and a second mortgage attached to it.
My child is in the 6th grade and attends a jr high parochial school. However, the parochial high school that she will attend in 2 yrs has had alot of issues with drugs and receives negative reviews. It costs $8400 a year now to attend the high school so in 2 years,it’s sure to increase and I don’t want to pay for her to go there with all those issues. The public schools aren’t accredited; therefore, I’ve been considering moving to a different area and renting where there are AAA rated schools.
I want to follow your advise in your previous responses to others and just stop paying and save to move.
Is there a way to keep up with the foreclosure and sale process if I follow through with your advice? I’ve heard before that the banks can and have sold homes, then padlocked the homes with police or court orders preventing the owners from entering to retrieve belongings. I just want to know before I stop paying, because I don’t want everything I have to be taken away when I could’ve moved it out beforehand.
Ana:
My advice is in two parts. First, stop paying. Second, don’t move out.
As long as you are in the house, you can keep track of the foreclosure process and move out when you have to. Moving sooner than you have to and leaving stuff there is the way to get into those problem you mention. I talk about this in my blog here. http://robertweed.com/blog/after-bankruptcy/file-bankruptcy-stop-paying-dont-leave-that-house/
I filed bankruptcy approximately 8 yrs ago. I chose to keep my house which had a second mortgage. I ended up having to short sell the house. I still have a second mortgage for 22,700. The original amount was under 25,000. So, i have paid approximately 13,000 over the years since I filed bankruptcy and still owe them 22,700. Am I legally binded to continue to pay this loan? When I call they mention I am protected by my bankruptcy, but I didn’t file bankruptcy on the house or second loan. So, I have a second loan that I am paying on for life and have no house.
Tamela:
Oh no, oh no. No you are not legally bound to pay that loan. There is certainly NO REASON to keep paying it after the shortsale. (Any, looking back, maybe there was never any reason to pay the second at all. But maybe there was since the value of the house has been up and down a lot over the last eight years.)
Tamela, you do not “file bankruptcy on” anything. You file bankruptcy, period. You still pay what you want to pay–the house or the car–and you still have to pay things like child support. But you don’t pick and chose what to file bankruptcy “on.”
Most people see it the way you do–that’s why it’s so important to have a lawyer that tries to get into your shoes and explain things from your point of view.
You tell me that when you call them, they are careful always to mention the bankruptcy. Are there bills really clear about that, too? How many months (or years) have you paid since the short sale.
You need to talk to a good bankruptcy lawyer in your area–and carefully look at the bills and the shortsale papers. MAYBE you can get back the money you paid voluntarily since the shortsale. It’s worth spending some time looking at that.
Thank you for all your help. I appreciate it. They never mentioned the bankruptcy part until the last couple weeks. No one can find my account, but, they said they are going to find out who has it so I can continue making my payments or to pay it off. They lost my account two months ago. They gave the account to someone else and then that company said that Chase recalled it. That is when it got lost. So, they looked at the active and inactive bankruptcy departments and still couldn’t find it. Then I mentioned I didn’t file bankruptcy on that loan. That is when she mentioned that I am still protected under the bankruptcy law. Then I asked her if I legally still had to continue to pay this loan and she said she couldn’t answer that question. At least now I know where I stand. And, I asked again, and again she said, I can’t answer that question. Thank you again.
I have a question. We filed a chapter 7 and it was discharged 3/2011. Our house was included and we only had one mortgage . We did move out and the bank hasn’t foreclosed on it yet. My question is do we have to wait the 3-4 years after a foreclosure or do we only have to wait the 2 years after a bankruptcy to buy a new home?
I THINK that both waiting periods apply to you. Both the after bankruptcy waiting period; and the after foreclosure waiting period. Since there hasn’t been a foreclosure yes, that waiting period hasn’t even started yet. But, I’m not a lender. I don’t know for sure. I don’t know if anyone does.
Both my own clients and other people on my blog seem to come close to getting approved after the bankruptcy, being told the foreclosure waiting period does NOT apply, and then something comes up and they lose the loan. That’s really all I know.
My Chapter 7 bankruptcy was discharged on 11/11. I took a loan for $10,000 from Cash Call on feb,2012 for a family emergeny. I haven’t been able to pay back my monthly installments. Can they garnish my wage? Or take me to court or jail. I will be paying them back, but my current situation is not letting me pay back the installments. Any advise will help.
Matji: I don’t know what state you are in or what the state laws are there. There’s some chance that the Cashcall loan is illegal in your state, and you don’t have to pay them anything. You need t track down a consumer lawyer in your state.
(Bankruptcy discharged Nov 2011; take a Cashcall $10,000 loan in February 2012. That wasn’t very smart. However I can tell you that they cannot take you to jail; and if they are threatening too, they may be violating the law in your state.)
Mr. Weed,
Our backruptcy was discharged 33 months ago. We stayed in our home keeping current on our 1st mortgage of $102,000 with GMAC and our 2nd mortgage of $24,000 with Bank of America. We want to move out and buy another home. The home is maybe worth $105,000. What happens if we stop paying the 2nd mortgage to save money.
Robert:
The key thing I can tell you is I don’t know whether not paying the second will make it harder for you to get approved on a loan to buy another house. I don’t know. I am pretty sure that stopping paying on the first mortgage would block you form getting approved any time soon to buy again, but I just don’t know anything about what happens when you don’t pay the second.
What I can tell you: the bankruptcy law still protects you, so they can’t call, can’t bother you, can’t try to sue and garnish you. And of course you would save money. I answer all that in my blog post–so I don’t think that’s what you are asking. But does it hurt your chances of getting a new mortgage sometime soon? I just don’t know.
I have a questions regarding chapter 7. I am a small business owner and considering filing a chapter 7. I have a first and second on a home which is under valued a little. Im current on the first but behind in property taxes and the second. The second sued me and we eventually worked out a payment plan. If I file the chapter 7 can I put the second in that while keeping my home and still making payments on the first mortgage.
1st with ING -431.200 they mod the first for me and put me in a fixed loan
2nd with Citi- 107,800 they were suppose to mod but since I was self-emplyeed told me I didnt qualify. They finally sued me and that was goign on for 1 year. just two months ago I reached a decision with them to pay month $325 bucks until the loan is paid off
My property taxes from last year were sold and I havent been able to pay those back.
Zillow Estimate says: $377,000
A realtor pulled sales and saw $490,000 for previous listings and sales
I can afford the first and HOA fees but thats it. Once I file bk I will be able to pay the taxes as well.
I have about 150k in debt from starting this business and I want to do the chapter 7 to brief a little bit.
Mr. Weed, My husband and I have stopeed paying our second 9 months ago. We are also not paying the first for approxiamtley 7 months. lots of issues with modifying that led up to our decision to “strategically” get out. The house is over $100k underwater. Fannie has been saying they want to work with us so I do everything I can, send paper after paper, months of nothing Meanwhile the 2nd is getting nasty. My marriage has fallen apart and we are ready to move on. We woudl like to file bk seperately, we have seperated but still live in same home, different rooms for financial reasons. Can we file bk seperate and each list the 2nd mortage, then not include the first mortgage then we can figure out the modification with them or eventually they will foreclose and we will not have to pay on the forgiven amount. Does that sound correct? Thanks
Tikki:
If Zillow says the house is worth $377,000 and you owe $431,000 to ING for the first, then Citi can basically do nothing about the second, after you file bankruptcy. Can’t call, can’t garnish–and they don’t have a hold of anything they can foreclose. So if you keep paying the first, you would be able to keep the house for a long time.
How long is the long time? That’s the issue–certainly in 30 years the first would be paid for and the second would then foreclose you. Some time sooner than that as values eventually go up and the balance on the first comes down. When would that be; your guess is better than mine, because you know real estate values in your neighborhood better than I do.
Before you ride off into Chapter 7, you need to talk to your lawyer about your business. Can you file Chapter 7 and keep your business? Well, does it own anything that’s salable? Does it have value as a going concern? Is it anything without you? Would your competitors want to pay some money to shut it down? What are the exemption laws in your state? I don’t know the answer to any of those questions, but I can tell you that you’ll need to go over that carefully with your bankruptcy lawyer.
Mishka:
Lots of questions. Husband and wife can always file separately if you want to. And if you are having issues, each having your own bankruptcy lawyer is certainly safer for the lawyers and maybe for you, too.
A different question maybe you were asking. Do you count as separated, as each a family of one for eligibility purposes, if you are still living in the same house. My personal answer to that is yes, but I can image judges going either way–no idea what your judge thinks about it or if it’s come up wherever you are. A good one to ask your lawyer.
A big mistake people make when they talk about bankruptcy is to say the word “include.” When you file bankruptcy EVERYTHING IS INCLUDED. Leaving things off the forms is LYING TO THE JUDGE.
But you can keep paying something and have to keep paying others. So you can file bankruptcy and still pay the first mortgage. You can pay anybody you want to pay–and if you can’t agree on the mortgage mod, than you not pay. Yep, you can pay or not pay–they can foreclose or not foreclose. You get to do what you want; the bank get’s to do what they want–EXCEPT the bank can go after the house if you don’t pay, but they can’t go after you.
Mr. Weed, our ch. 7 was discharged in June 2009. We kept the payments on the first and second current until March 2012, when we stopped paying on the second. We have received numerous calls at work & home requesting past due payments. We’ve advised them that they are violating bankruptcy laws,but they’ve said that it was discharged in 2009. We have no idea what that means. The credit report that I ran does not show bankruptcy for the second but the first does. It shows that all payments had been received up and until we stopped paying where the first does not show payments made and reflects the bankruptcy.
1st question: Are they suppose to be calling us?
2nd question: Shouldn’t our credit report show no payments for the second just as the first does?
3rd question: What can we do?
David:
1. No, they should NOT be calling you.
2. Right
3. Talk to your bankruptcy lawyer about suing them for a discharge violation. If it’s a debt collector, rather than the original creditor, it would also be a violation of the Fair Debt Collection Act. In some states, not Virginia, it would also be a state law violation. I ALWAYS sue when a creditor tells my client that the bankruptcy somehow does not protect them.
On the credit reports, your rights usually start when you do a dispute. So you need to get credit reports from each of the three credit bureaus. I have their 800 numbers here. http://robertweed.com/blog/after-bankruptcy/after-bankruptcy-getting-back-to-good-credit/. the right dispute letters to each credit bureau asking them to fix it. If that doesn’t work you’ll want to find a Fair Credit Reporting Lawyer in your state. Your bankruptcy lawyer might know one, or be one. Or you can look here. http://naca.net/find-attorney
Hello,
We currently have 2 mortgages with Bank of America. 1st for $145,000 2nd for $45,000.
We filed for chapter 7 bankrupcy and our home was not included. It was discharged in Dec 2010. Ive continued to pay the 2nd on time every month but have fallen behind several times with the 1st. As of January 2012 we were approved for a home modification on the 1st.
We have been making payments on the 1st and the 2nd now since January and realize we just cant do it anymore. We are considering staying current with the 1st and stop paying the 2nd. Can Bank of America still forclose on our house? We were also considering a short sale. Any input would be greatly appreciated.
Thank You !
We had a chapter 7 discharge 9 months ago. We are very underwater for our first and second mortgage. We are ready to move on but would like to be able to buy another place in a few years and not wait for 3 years after BOA gets around to foreclosing.
My question is, if (or rather when) the house is foreclosed on will it impact my ability to buy a new home. Both my husband and I filed chapter 7, but only his name was on the mortgage. I am on the other paperwork, but not the mortgage. I know that we have to wait 2 years because of the bankruptcy, but I’d hate to then wait an additional 3 years after BOA gets to a foreclosure.
My second questions is, what are our options for the second mortgage given the rare chance that BOA does a principal reduction and we decide to stay. A lawyer said that they might do that but we are not sure about how this would impact the second mortgages. We have not paid either mortgages in well over a year at the advice of a lawyer. We’ve been trapped in an undecided MHA program for 3+ years.
Thank you!
Mel:
My GUESS is that YOU would be able to buy after two years–but that would depend on you qualifying without needing a co-signer (your husband’s income). I don’t know that, though.
I rarely see principal reductions, but the political situation continues to build up some pressure on that. Sometimes the second mortgage will get forgiven. There’s a government program that gives them a little money to forgive worthless second mortgages.
Jen:
I always have to start by telling people the mortgage was “included.” Everything is “included” when you file bankruptcy. Some things you still have to pay–child support. Some you still want to pay–your house. But you file bankruptcy “on” everything.
(Now I hope you are not saying you “reaffirmed” the mortgages–that’s a terrible idea that some people do. If you reaffirmed then they will sue you and garnish you on that second mortgage. I don’t let my clients do that, but some people do. CHECK with your lawyer.)
Can they still foreclose on the second? Yes. WILL THEY is the question. Not if they won’t get any money. You’ve posted your question here, where I have my best explanation of that. Don’t know the details of your situation, so I really can’t add anything.
(Maybe I can add one thing. I’m seeing more and more that they forgive the second mortgage, after a mod on the first, because they government will give them some small incentive to do that. But I can’t speak to the details of what they might do in your situation.)
SHORTSALE? That’s a question for you–a life question. Do you WANT to keep this house? Then you want to see if they will forgive the second or cut you a deal. What are your chances? Sorry, don’t know. That’s the nerves of steel strategy I talk about in my blog.
Are you sick of this house? Then yes, put it up for a shortsale and plan to buy again in a few years.
The answer to the shortsale question starts with what you want.
← Previous Comments