QUESTION: I receive a notice of default today in the mail today. We have been behind in our mortgage payments for four months. Our principal loan is now $600,000; however, the market value of the house is only $450,000. Our second mortgage is approximately $120,000, as an equity line of credit (HELOC) to improve the house. We also have a sizable credit card debt in the amount of $70,000 to about 5 card companies.
I am a nurse and my husband works in construction. We used to have good income. However, my husband lost his job two months ago and my second job does not call me as often. He receives unemployment pay. Still, our combined income only averages $8,000 per month. Due to the dip in our income, we are struggling to pay our bills. If we can only get rid of our credit card payments and the second mortgage payment, I believe we can survive this recession. We have 2 children who are still studying and we do not want to give up our house. Can we still keep our house? Should I file for bankruptcy? Friends say that we will not qualify for bankruptcy under Chapter 7 because we have too much income. What are our options?
Answer: Many banks are now exempt from the California Foreclosure Prevention Act, which mandates that lenders wait an additional 90 days from the date of filing of a notice of default before the trustee can give notice of sale in a non-judicial foreclosure. This law increased the waiting period to six months. However, many banks are able to obtain exemption and they only have to wait three months from the filing of a notice of default before providing the notice of sale.
Still, there are several options available for you. First, you can opt for "loan modification" with the lenders. California Civil Code Section 2923.5 mandates lenders to "explore all options" to avoid foreclosure before initiating the foreclosure process.
Since the fair market value [$450,000] of your house is below your principal loan [$600,000] , you are under water for $150,000. Your loan modification will be based on financial hardship because of your circumstances. However, you can try to negotiate with the bank to lower your interest rate, extend the term of the loan, or even lower your principal. Your second mortgage is totally under water. On the threat of filing bankruptcy, you can negotiate with the second lender to lower the principal.
Second, you can get rid of your credit card debts and your second mortgage by filing Bankruptcy under Chapter 13. Chapter 13 will allow you to keep your property and pay only a portion of your debts over time, usually 3 to 5 years. Unfortunately, your combined income is still above the median income for California. That is why you cannot file Chapter 7, which is a total discharge of all debts.
Hence, if you file Bankruptcy under Chapter 13, you can lien strip your second or junior loans which are under water. After you have filed Chapter 13, you can now file a Motion to Lien Strip your second mortgage. After hearing, the court will declare the HELOC loan off your property title and it will become an unsecured debt. You will still be paying this loan, however, since it becomes an unsecured debt it falls in line with your other unsecured debts such as credit card or consumer debts.
Third, with regards to your credit card debts, you can negotiate with each credit card companies so that they will accept much less payments than the balance owed, either with or without filing for bankruptcy.
You must bear in mind that bankruptcy will not hold off foreclose indefinitely. Eventually, the creditor will want to get its collateral. Hence, if you really want to retain the second property, you need to be able to pay the mortgage or have a successful loan modification to lower your mortgage payments. You must find a good attorney who can handle your bankruptcy and loan modification at the same time.
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If you have any loan from countrywide or any of its affiliates, please call our office at 213-639-3888 or e-mail us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it . Our office is located at 3699 Wilshire Boulevard, Suite 720, Los Angeles, California 90010.
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This article does not constitute any legal guarantee or advice for any individual matters and does not create attorney client relationship with the readership.
( Published October 10, 2009 in Asian Journal Los Angeles p. C5 )
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