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Monday, June 24, 2013


Unfortunately, in our present economic times, many people with medical insurance still incur large medical debt when an illness requires hospital care, or protracted medical treatment.  Depending upon the medical diagnosis, certain strategic planning may be necessary in order to protect a person's or families' personal budget, and in order to qualify for important medical financial assistance programs. 

Unfortunately, a recent article in Forbes told a story that is all too common for people who have gotten sick. 

The choice of which bankruptcy chapter to file, and when is the correct time to file the bankruptcy case varies from case to case.  Medical debt is dischargeable in bankruptcy in both Chapter 7 and Chapter 13 cases.  The timing of when the medical debt was incurred, and what procedures were obtained should be considered.  If you are thinking about filing bankruptcy for medical debt reasons, then the possibility of not filing bankruptcy, and seeing if other alternatives are available should usually be explored before a bankruptcy case is filed.  Many hospitals have internal programs that will reduce the debt, and allow for a portion of the debt to be paid by the uninsured.  Many health care providers will accept a stepped down, or compromised payment from the sum owed.  Before filing for bankruptcy, these programs should be explored. 

When no payments are made on medical debt, like other unpaid debt, the debt will be assigned to collection agencies or attorneys.  Again, this debt can be settled or compromised without filing for bankruptcy.  Usually, collection agencies will be reasonable with settlement offers if the person does indeed qualify for a bankruptcy filing.  If a person finds themselves in this situation, then it is wise to consult with a bankruptcy professional, and perhaps have this person work on settling the debt.  The debt can often be settled for 25 percent, based upon the face amount of the debt.

Bankruptcy should be considered if there is no way to make some sort of compromised payment to the creditors.  However, it is wise to time the bankruptcy filing so that no new significant medical debt will be incurred after the bankruptcy case is filed.

See this article for more information on bankruptcy and medical debt.  

Friday, June 7, 2013

Can I get rid of my second mortgage through a bankruptcy case?

In today’s economic climate many individuals are able to “get rid” of a second mortgage through their bankruptcy case.  The legal jargon for getting rid of a junior lien in a bankruptcy case is “strip off,” or “lien avoidance.”  In a Chapter 13 bankruptcy case an individual debtor can strip off or remove a junior lien from their home and treat it as an unsecured debt if certain conditions are met.  That means the second mortgage will be treated as an unsecured creditor (the same as credit cards and medical bills).  In a typical case the second mortgage will not receive any money, but this is not true in all cases.  Depending on different factors such as income and assets owned some individuals are required to pay a percentage of their unsecured debts.

A junior mortgage can be stripped off in a Chapter 13 bankruptcy case if the value of the home is less than the amount owed to the senior liens.  An example is shown in the chart below:

Value of Home
Principal owed to 1st Mortgage Holder
Principal owed to 2nd Mortgage Holder
Is a lien strip possible?
Scenario 1
Yes, the 2nd mortgage of $75k can be treated the same as other unsecured debts
Scenario 2
No, the 2nd mortgage remains in place and must be treated as other secured debts

            To be able to get rid of your second mortgage in your bankruptcy case certain procedures must be followed: (1) a Chapter 13 plan that states that the lien will be stripped or removed; (2) a motion and accompanying documents must be filed with the court, and (3) a court order must be obtained.  The creditor has a chance to object to the motion if the creditor believes that the home is worth more money (that the value exceeds the amount of debt owed to senior liens as in scenario number 2).  A creditor's objection can in a small number of cases turn into a mini trial on the value of your home (this is called an evidentiary hearing).

            The typical lien strip order issued by the court requires the individual to complete their bankruptcy case and receive a discharge before the lien is actually removed.  So if for some reason your case is closed before you actually complete it you will still owe the second mortgage creditor and they still have the ability to foreclose on your home (once you are no longer protected by your bankruptcy case).  

            At the end of the case, a judgment can be applied for from the court which says that all conditions have been met and the lien is officially stripped.  This judgment should then be recorded at the county recorder’s office to put the world on notice that the second mortgage is no longer valid.

            As the economy stands today there are many individuals who are able to take advantage of the bankruptcy code provisions allowing the removal of a second mortgage.  However, this may not be true for long as housing prices are increasing.