Last month, a New Jersey bankruptcy judge issued a ruling in a case that could help many people strip off a second mortgage on their homes, even if they have previously filed bankruptcy.
People sometimes come to my office behind on their mortgage with no way to bring it current. Due to job loss or income reductions, they can barely make the regular payments even if they were up-to-date, let alone pay crushing credit card debt and medical bills. They often end up filing a chapter 7 bankruptcy to wipe out other bills and resign themselves to losing their home. But what happens if, a year or two later, things change, and they are able to get current in a chapter 13 plan? Assuming the mortgage company has not already gone to sheriff sale, is there anything that can be done? Well, thanks to this recent decision, there is!
In the case of In re: Gloster, decided on October 13, 2011, Judge Winfield in Newark ruled that, under certain circumstances, people can file a chapter 7, discharge their credit card debt, and then later file a chapter 13 to hold off a foreclosure by paying into a plan to bring the loan current! Colloquially called a "Chapter 20" (a chapter 7 followed by a chapter 13), this has been around for a long time, but the question has been whether this can still be done after the changes to the law in 2005. The judge said that this can be done as long as:
- The chapter 13 was filed in good faith; and
- The proposed payment plan meets all the requirements of the bankruptcy code.
The best part of all of this is that the debtors in that case were able to remove their second mortgage entirely and only pay the first one! This is an option in a chapter 13 where the first mortgage balance is greater than the value of the home. Thus the second mortgage does not have any equity to act as collateral for the loan. If a debtor completes a plan, the second mortgage can be removed permanently, leaving the homeowner with only one mortgage payment instead of two!
If you are a New Jersey homeowner who owns a home with more than one mortgage, but only enough value to secure one of them, and needs to file bankruptcy, contact my office today to discuss the possibility of stripping off the second mortgage. Although this ruling may not be followed by the other judges in New Jersey, it is certainly worth looking into!