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Chapter 7 Bankruptcy: discharge of 2nd mortgage

There is obviously little concern with the primary lender in the question, but it is not clear that the proposed or pending sale of this house will sufficiently cover that particular loan.  Before going further it is worthwhile to review some points in Chapter 7 actions surrounding a listed asset, the house, and listed liabilities, the two loans, one a mortgage, and the second being a particular type of “matched dollar” loan.  In a Chapter 7 bankruptcy an asset that is the security for a loan or mortgage is called a secured asset.  This is the situation with this person’s house.  A secured liability usually survives a Chapter 7 bankruptcy.  This means that the debt(s) for that asset still exists, the lien(s) still exists, what the debtor owes still exists and the limitations on selling still exist.  Some people believe that a bankruptcy discharge from Chapter 7 means that the debtor no longer owes debt on a secured asset.  Unless that is explicitly called out in the discharge, the debt still exists.  Also, the listed secured asset is still on the bankruptcy assigned trustee’s list.  If the market changes or improvements are made and the assets become worth more, the trustee can still seize and liquidate the asset.  This is a shock to many an uninformed debtor.  So, we return to the stated situation.  The second lien, the rehab loan, is seven years old in a fifteen year stint.  Typically these loans require the person taking the loan to match the loan upfront and to spend that upfront money in the rehab first, and then the loan money becomes available.  Assume that this is what has happened.  The loaning entity allegedly has someone come out periodically to check that the loan money is spent on the stated and correct repairs.  Unless some of that loan money is still unspent, it appears likely that the second loan lien could be requested to be removed.  No idea what might happen here.  This debtor must consider the real possibility that the loaning entity would block the sale with its lien.  It is essential for the debtor to contact this loan entity to discuss the situation and determine what is likely to occur.

Some people wonder why this debtor is selling the house rather than simply allowing and forcing foreclosure, or simply abandoning, and again, forcing foreclosure by the primary mortgage holder.  Given the stated situation, there is nothing to be gained by the sale.  In fact the sale could be worse, because that is when the primary and the secondary lien holders could request deficiency judgments, saddling the debtor with continuing burden.  The debtor is going to suffer the liens for some added period of time, be it foreclosure or judgment.  Foreclosure, believe it or not, is the cleanest and quickest route out from under this situation.  The law sets time limits for liens following foreclosures and what the relationship is between the loan companies and the debtor after foreclosure.  A lawyer, again, is an essential person the debtor needs to consult.

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