Question 1. I have heard that the second is considered unsecured for purposes of bankruptcy. Is this true?
A: Yes, but only if (1) the 1st is worth more than fair market value (which on your facts is false); (2) the debtor files a motion with the bankruptcy court to have the 2nd declared unsecured, and (3) the debtor successfully completes the bankruptcy plan.
2. would the bankruptcy trustee consider this property to have equity or not, given the above estimates?
3. if i could buy the property on a short sale of $400k, would the bankruptcy trustee be likely to allow it and remove it from the bankruptcy
A: Probably, if the secured creditors aproved the deal, and no unsecured creditor is prejudiced.
4.My real thought is to buy the first from the noteholder at its face value, and continue the foreclosure, thus wiping out the second and getting the deed.
A: That's legal, as longas you get an order lifting the automatic bankruptcy stay, which assumes that the debtor is not current on the 1st.
Hope this helps.
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Not being current is all the court needs, unless the bankruptcy plan expressly permits the borrower to catch up the payments over the course of the plan, and the debtor is current on the plan -- then you're stuck unless the debtor can't pay according to the plan.
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