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TJ, Esq.
TJ, Esq., Attorney
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Mortgage / TD secured real estate note vs bankruptcy: I own

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Mortgage / TD secured real estate note vs bankruptcy: I own notes in several different states, both judicial and non-judicial. What happens to the Note and what happens to the TD or Mortgage when someone files BK 7 or 13 for both 1st and 2nds?
I've been told that if I have a 2nd TD and the 1st is underwater, the BK court can strip the lien. Is that true? And what does that mean? What are my rights after the BK is discharged or dismissed?
Submitted: 10 months ago.
Category: Bankruptcy Law
Expert:  TJ, Esq. replied 10 months ago.
Hello and thank you for the opportunity to assist you. My name is XXXXX XXXXX I will do my very best to answer your legal questions.

The general rule is that the note can be discharged in bankruptcy, but that the TD remains. This means that the debtor no longer owes the debt, but the creditor may foreclose on the property just like before the bankruptcy. If there is a deficiency, however, then the you would not be able to go after the debtor because the debt was discharged.

The exception to the rule occurs in a Chapter 13 if the 1st lien is underwater. As you suggested, your second TD could be stripped, which means that the lien is voided, and the debt is treated as a an unsecured debt in the bankruptcy. At the conclusion of the bankruptcy, the debtor would be discharged of the debt. I will point out, however, that a Chapter 13 requires the debtor to pay into a plan that usually lasts from 3 to 5 years, and those plan payments are distributed pro rata to unsecured creditors. So, it's possible that you would get something. Depending on the debtor's particular circumstance, it could be full payment or just pennies on the dollar (the latter, unfortunately, is more common than the former).

After a discharge, you are precluded from taking any collection action since the debtor no longer owes the debt. Trying to collect would be a violation of the bankruptcy code, and would put you at risk for sanctions. But if the bankruptcy is dismissed and closed without a discharge, then you may resume collection activity as if the bankruptcy were never filed.

Does that answer your question? Please let me know if you need clarification, as I am happy to continue helping you until you are satisfied. Also, your positive feedback is greatly appreciated. Thank you for using our service!

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Customer: replied 10 months ago.

Thank you for your answer.


 


So in all BKs both 7 and 13, the note is set aside and discharged, personal guarantees are removed, no collection for payments can be done. If the BK is dismissed and not completed, then we are back to our original position.


 


During a Ch 13, the Note remains, but the TD or Mortgage might be removed or "stripped", leaving just the note. I assume that would only happen at the end when the BK is discharged.


 


A 1st TD or Mortgage will always remain on the property, even after a discharge.


 


So at what time during this process can I start or complete a foreclosure?


 


In a bankruptcy, is a mortgage treated any differently than a trust deed?

Expert:  TJ, Esq. replied 10 months ago.
Hello again.

Q: So in all BKs both 7 and 13, the note is set aside and discharged, personal guarantees are removed, no collection for payments can be done. If the BK is dismissed and not completed, then we are back to our original position.
A: In all bankruptcies? No. It is true in most bankruptcies. There are always exceptions in unusual cases. For example, the debtor may want to reaffirm the debt for some reason. Or maybe the debt can't be discharged because of fraud. But in most cases, the debt is discharged, and that precludes collection activity. Or, if the case is dismissed, then collection activity can begin again.

Q: During a Ch 13, the Note remains, but the TD or Mortgage might be removed or "stripped", leaving just the note. I assume that would only happen at the end when the BK is discharged.
A: At the end of the Chapter 13, the note would typically be discharged. The TD would remain, unless it can be stripped off due to a lack of any equity to secure it. If it can be stripped off, it doesn't take effect until the plan is completed.

Q: A 1st TD or Mortgage will always remain on the property, even after a discharge.
A: Yes.

Q: So at what time during this process can I start or complete a foreclosure?
A: If the note is not being paid, then you can either wait until the bankruptcy is closed, or if you'd like to start foreclosure proceedings before it is closed, then you can file a Motion to Lift the Automatic Stay. This is basically a request that the court allow foreclosure proceedings because the note is not being paid. The court almost always grants the motion.

Q: In a bankruptcy, is a mortgage treated any differently than a trust deed?
A: No. They are both treated as secured debts. So far as bankruptcy is concerned, they are identical.

I hope that helps. Let me know if you need clarification.
TJ, Esq., Attorney
Category: Bankruptcy Law
Satisfied Customers: 9701
Experience: Licensed to Practice Law
TJ, Esq. and other Bankruptcy Law Specialists are ready to help you
Customer: replied 10 months ago.

Do these BK rules apply in all states, or are there other rules in other states.

Customer: replied 10 months ago.

How does a Homestead work in this case?


Does it protect the homeowner when there is no equity, ie the 1st and 2nd owed is more than the value of the house?

Expert:  TJ, Esq. replied 10 months ago.
Hello again.

Yes, what I described applies in all states. The Bankruptcy Code is Federal law, so it applies everywhere.

A homestead exemption is only useful if there is equity because the homeowner can only protect the value of the property that is over and above what is owed to secured creditors.

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