The rise in market value of real property has been a welcome change for most homeowners. It provides an opportunity to refinance, sell, or pull money out of the equity for renovations, and/or home improvement projects or for other purposes. For many it is a replay of what was happening in the years and months leading to the real estate crash from 2006 to 2011.
Some of our clients who owned property and filed for bankruptcy relief under Chapter 7 when the market value tanked, are now looking to sell, refinance, or get a Home Equity Loan (HELOC). Some are remembering that there was a 2nd or 3rd mortgage or HELOC on the property when they filed Chapter 7. Some are forgetting that the Chapter 7 discharge did NOT, and cannot, remove the lien on the property and are surprised that the lender is now surfacing to prevent or complicate the sale or refinance until the lien is satisfied.
Because of the Chapter 7 discharge, lenders are prohibited from collecting directly from the debtors but they retain their lien rights against the property and can hold up the refinance, sale, or transfer of property until their lien is satisfied. They will even foreclose on the property if the market value has increased to the point they will be able to recover.
Because several years have passed since most of these type of bankruptcies were concluded and there probably has been no communication from the lenders, this reminder is being shared to all who had homes with 2nd mortgages and/or Home Equity Loans (HELOCS) when their case was filed.
If you are planning on borrowing against the equity in your home, please remember to consider that the equity will be reduced by the amount of the lien, including interest, that has been sitting there all this time. There is no provision in the laws of the State of California or Federal Bankruptcy Laws that allow removal of liens resulting from 2nd Mortgages and HELOCs in a Chapter 7 case.
Judgment liens are different and, in some cases, may be removed by re-opening the bankruptcy case if it has closed, and/or filing a motion to avoid the lien because it impairs the homeowners exemption. If you find your home is in this situation and cannot work out an agreement with the lender, then ask us to consider if we can help get the lien removed.
In some cases, the filing of a Chapter 13 is available as a tool to strip a lien even it is a 2nd Mortgage or HELOC and the fair market value of the home is still less than the balance of the 1st Mortgage.
The good news of the rising market value of homes is welcome for homeowners and for lien holders. Many lenders are now recovering some of the money they lost when the loans were included in the bankruptcy because the homes have enough value to pay at least something to get the lien released. This should not be a surprise for Chapter 7 debtors, but understandably, after many years of no phone calls, collection letters, threats, etc., some have forgotten that the lien on the property survived the bankruptcy. This reminder is intended to help you plan and be ready when you consider selling, refinancing, or getting a home improvement loan.