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Underwater Second Mortgages, Third Mortgages or Equity Lines of Credit and Bankruptcy

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Are you struggling with paying your first mortgage, second mortgage or even third mortgage each month?  Is your house worth thousands less than what you owe?  You are not alone.  Millions of Americans have watched the value of their homes decrease month after month the last four or five years.

Many homebuyers purchased their homes with an 80% first mortgage and 20% second mortgage.  This allowed the homebuyer to avoid private mortgage insurance and put 20% down on the home.  To make matters worse either one or both loans could have been interest only loans.  Interest only loans allow the home buyer to only pay the interest for a period of time.

So you have a home that is worth less than what you owe and you are only making the minimum interest only payment each month on the first and second mortgage.  Any little financial problem will send you into a financial tailspin.  The good news is that bankruptcy can help.

In Chapter 13 and Chapter 11 unsecured liens or loans can be stripped off the property in the plan of reorganization.  How can you get rid of a mortgage in bankruptcy?  Well, if the value of your house is less than what is owed on the first mortgage, then the second mortgage is completely unsecured or underwater.  If the house was sold or foreclosed on the second mortgage company would get nothing, and that is how they are treated when reorganizing your debts in a Chapter 13 or Chapter 11 bankruptcy case.

The key is the value of the house.  The first thing that needs to be completed is a valuation of the house by the bankruptcy court.  A motion is filed with the bankruptcy court asking the bankruptcy court to value your home based upon comparable sales in your neighborhood.  If the second mortgage company accepts the value you believe to be true there will be very little more to do.  If the second mortgage company objects to the valuation an evidentiary hearing or mini-trial as to the value of the house will be scheduled.  Of course the second mortgage company is trying to prove that your house is worth more than is owed on the first mortgage.  If they are successful then the second mortgage is not completely underwater and not removable.  If it is held that your house is in fact worth less than the first mortgage you will be able to strip off the underwater second mortgage or equity line of credit.  You will only have to pay the first mortgage and the lien securing the second mortgage will be reconveyed once the Chapter 13 plan or reorganization is completed.

For more information about underwater mortgages from our bankruptcy lawyers or how bankruptcy can help you, please call our experienced bankruptcy attorneys at 1-877-963-9543.

Covanta Harrisburg, Inc. Seeks Dismissal of Harrisburg Bankruptcy

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The incinerator operator, Covanta Harrisburg, Inc., drew first blood today by filing their objection and brief in support, seeking the dismissal of the bankruptcy petition of the City of Harrisburg.  Covanta is at the center of the cities bankruptcy filing given that the bonds used to fund the incinerator are what the city is having trouble paying back.

Covanta cites section 921(c) and section 109(c) for authority to dismiss the bankruptcy petition.  Under section 921(c) the court may dismiss a petition if the debtor did not file the petition in good faith or the petition does not meet the requirements of Title 11.  Covanta is arguing that the petition was not filed in good faith because of Pennsylvania Act 26 of 2011 and that the petition makes no mention of this state law.  They are also arguing the requirements of section 109(c) are not met.

Covanta argues that Harrisburg is not eligible to be a debtor pursuant to section 109(c) of the bankruptcy code.  You may remember in a previous article in the Bay Area Bankruptcy Blog details about who can be a debtor and who may not.  A municipality must be specifically authorized to be a debtor by state law or by a governmental officer or organization empowered by State law to authorize the municipality to be a debtor.  The Commonwealth of Pennsylvania passed a law providing a city such as Harrisburg cannot file for bankruptcy protection.  Rather the state can step in and appoint a receiver to help the city form a plan to become solvent.  The State of Pennsylvania did just that on October 20, 2011, when Governor Tom Corbett signed Senate Bill 1151.  This bill declares a fiscal emergency and provides a receiver may be appointed to create a plan of recovery.  See Act 26 of 2011, 72 P.S. Section 1601-D.1 (2011).

Covanta also is arguing that the petition is invalid because the person who signed the petition did not have authority.  Just like the Mayor of Harrisburg, Covanta argues that all laws and legal matters must be presented to the City Solicitor for approval.  The four council members that voted for and authorized the filing of bankruptcy by the city have been called “unauthorized council members.”  The Mayor argues that only she as the executive can sign the petition and bind the city to filing bankruptcy, not a council member.

This is probably one of many more objections and briefs to be filed in support of dismissal of this bankruptcy case.  The Commonwealth of Pennsylvania has already passed a law appointing a receiver, the Mayor of Harrisburg representing the City of Harrisburg has opposed the filing, and now the incinerator operator has lined up against this bankruptcy case.  The question still is whether the Tenth Amendment of the U.S. Constitution will force the Bankruptcy Code to defer to the state law of the Commonwealth of Pennsylvania which arguably forbids this bankruptcy filing by Harrisburg.

For more information from an experienced bankruptcy lawyer or from a Redwood City bankruptcy attorney visit us at www.westcoastbk.com or call us toll free at 1-877-963-9543.

How Does the U.S. Debt Downgrade Affect Consumers?

By Kitty J. Lin, Attorney at Law

On Friday, August 5, 2011, Standard & Poor’s downgraded the U.S. Treasury Debt from an AAA rating to an AA+ rating.  S&P indicated that one of the major reasons why they decreased the rating was due to Congress’ plan to reduce the country’s debt did not satisfy S&P’s standards for stabilizing our country’s economic situation.  S&P’s explanation seems hypocritical given that S&P was one of the reasons we are in this financial crisis.  S&P had given high credit ratings to companies that did not deserve it and that was a factor that sank our economy.  A lot of companies that were issuing subprime mortgages were enjoying the effects of being in S&P’s favor until the bottom dropped out from underneath them when the real estate bubble burst.  This led to millions of Americans seeking protection from the bankruptcy court.

One of the biggest effects of the downgrade was stock volatility.  Once news of the debt downgrade hit, stocks tumbled drastically on Monday following the debt downgrade.  Consumers were panicked, and a lot of them flocked to U.S. Bonds, which is the safe haven in the world of investments.  On Tuesday, August 9, 2011, the Federal Reserve expressed their doubts about the economic recovery and promised that they were going to keep the federal funds rates at 0 to 1/4% until mid-2013.  This is the longest commitment period the Federal Reserve has ever made to keep the rates low.  The federal funds rates are what banks pay to borrow money.  Thus, theoretically, the lower rates the banks have to pay to borrow money the lower the rates consumers would have to pay to borrow money from the banks.  This is good news for consumers facing a credit crunch.  Hopefully consumers will be able to obtain better rates or refinance their existing debts to prevent bankruptcy.

One of the silver linings from this crisis is that mortgage rates will decrease or remain low.  Now is the perfect time to buy a home or refinance your loan.  Home values are still low, and now mortgage rates are also low.  If your financial situation allows you, now is the time to take advantage of the crisis and put yourself in a better position for the future.

Unfortunately, consumers that wish to just keep their money in their savings account with their bank will not see much increase.  In fact, the savings rate is practically non-existent.  Currently many people are trying to keep their money safe in banks.  Demand for loans still remains low, even with attractive low rates.  Most consumers currently do not have the ability to capitalize on the low rates; most of America is trying to survive on a daily basis and are living from paycheck to paycheck, never knowing if they will still have a job the next month.  Consumers in this group are essentially bankrupt and are in danger each month of defaulting on their debt payments.  Consumers that are in this group would not be affected much by the debt downgrade, as they normally do not have the credit to take advantage of the low mortgage rates or the available equity in their homes to refinance their loans.

If you need additional information about municipal bankruptcy cases or bankruptcy in general, you may contact one of our bankruptcy attorneys or bankruptcy lawyers.

What Happens if I Cannot Afford to Continue Making My Chapter 13 Plan Payments?

By Kitty J. Lin, Attorney at Law

Let’s face it – the economy is unstable.  If you’re one of the lucky few people that are 100% certain that your job is secure, then you are in the minority.  Most people don’t know if they will still have a job a month from now.  Therefore, it’s not surprising that even if you file a Chapter 13 bankruptcy case, that doesn’t mean your income will be the same throughout the term of your plan.  The basic concept behind the Chapter 13 “Wage Earner” bankruptcy plan is that, taking into account the income that you earn, minus all the allowable deductions, you have some money left over at the end of the month to pay your creditors.  To be considered a good faith filing you need to make sure that all your disposable income is being paid into the Chapter 13 plan. That may be easy to do in the beginning of your Chapter 13 bankruptcy term, but what happens when you receive a pay cut, or worse, lose your job?  Your expenses don’t decrease just because your income does.  Most expenses, like utilities, food and car insurance remain constant.  If there is a loss of income, you may not have sufficient funds each month for your Chapter 13 plan payment.  Therefore, what are some of the options that are available for you?

Converting Your Chapter 13 Bankruptcy into a Chapter 7 Bankruptcy Case

One of the first things to be determined is whether you would otherwise qualify for a Chapter 7 based on your current circumstances.  If you do qualify for a Chapter 7, then you can file a motion with the court to convert your case to a Chapter 7, and have your case be treated like it was a Chapter 7.   This means that you would receive a discharge of all your allowable unsecured debt within three to four months after the conversion to a Chapter 7, and then your case will be closed.

This option is good if you have no arrears for secured debt that you were paying through the Chapter 13 plan.  If there were arrears (for example, if you owed money to your first mortgage lender), then those arrears would need to be paid off.  If you cannot afford to pay back the remainder of the arrears, your collateral may be repossessed or foreclosed.

Essentially, all benefits that you enjoy in a Chapter 13 would no longer be applicable if your case is converted to Chapter 7, such as the lien stripping of a junior mortgage.  Even if the judge granted the motion to strip your junior mortgage, the lien is not taken off your property unless there is a successful completion of your Chapter 13 plan.  Converting your Chapter 13 case into a Chapter 7 case means that your Chapter 13 plan was not successfully completed, and therefore, no lien stripping.

Modifying Your Chapter 13 Plan

If you cannot qualify for a Chapter 7 or it is not in your best financial interest to convert to Chapter 7, the next option is to try to modify your Chapter 13 plan payments to a lower amount.  The judge may allow you to modify your Chapter 13 plan if you can show that there are changed circumstances which make it hard for you to continue making your plan payments.  The amount lowered depends on your specific case.  In some cases the Chapter 13 plan payments are already the lowest possible, and therefore a lower payment will not be feasible in the case.  If that were to occur, then the other possible option is to have your Chapter 13 case be dismissed.

Dismissal of Your Chapter 13 Case

Your Chapter 13 bankruptcy case may be dismissed either voluntarily or involuntarily (by the request of the trustee or creditors) due to non-payment.  If your case is dismissed, then your debts are not discharged, and you are back in the same position as before you filed your bankruptcy case.  Any amounts that were paid to creditors through the Chapter 13 plan will be credited towards your accounts with these creditors, but you will still owe the remaining balance.  If you were behind on your mortgage or car payments at the time the Chapter 13 case was filed, then your house may be foreclosed on and your car can be repossessed after dismissal and loss the protection from the bankruptcy court.

If you are facing some difficulties in your current Chapter 13 case, and you need to seek the advice of an experienced Fremont bankruptcy lawyer or San Jose bankruptcy lawyer, please contact us at 877-9NEW-LIFE or 877-963-9543 for a free consultation.