Every banker's heart sinks a little when a second trust deed borrower files a Chapter 13 case. You think, "There goes another one--into the non-accrual void--that I'll never see again."
Despair not! There is no reason to give up on your junior trust deed secured by a Chapter 13 debtor's home.
The Chapter 13 debtor must contend with the special creditor protections written into Section 1322 (b) (2) of the Bankruptcy Code, prohibiting a Chapter 13 plan from modifying the rights of a holder of a secured claim "secured only by a security interest in real property that is the debtor's principal residence." This is a strong shield, if your loan can fit behind it.
In the ordinary course of a Chapter 13, the debtor will file a motion asking the Bankruptcy Court to declare the junior trust deed claims as unsecured. This will generally occur fairly early in the case, well before the plan comes up for confirmation. The debtor's argument goes: The debtor's home is worth less than the senior trust deed, so the second is really an unsecured claim and can be treated as such in the Chapter 13 plan.
The creditor's countermove should be to oppose the motion and present appraisal evidence of equity. Accordingly, the first thing the lender must do is to ascertain whether the junior trust deed is supported by any equity. If the court finds that there is even id="mce_marker" of equity that drops down to the second trust deed, then the entire junior loan is safe from attack and will have to be treated as a secured loan in the plan. Of course, the reverse is also true: If there is no market value over and above the balance of the senior trust deed, the junior trust deeds will simply be treated as unsecured debt.
If you believe that your junior trust deed attaches to some equity in the debtors's principal residence, what should you do? First, call your lawyer and file an opposition to the debtors's motion, and to do it quickly. Ordinarily, these debtor's motions are set with a relatively short time to use, sometimes as short as a week or two. If you do not have the appraisal evidence you need already in your file, your counsel should request an extension of the hearing in order to get the property value. Usually, the debtor's only evidence will consist of a self-serving declaration that the value of the property is no more than the balance of the senior trust deed, perhaps supported by a property tax statement. Once the creditor has appraisal value showing equity falling to the junior trust deed, however, the debtor can be approached for a stipulation to resolve the issue, in order to reduce the cost and risk of a valuation hearing.
For example, suppose you have a $50,000 HELOC with a face rate of 9%. The debtor should not struggle very hard before taking an offer of $500 per month for 60 months, in full satisfaction of the obligation. This will deliver to the lender $43,500 in 5 years, instead of the contract rate over a 15-or 30-year payoff, as written. In other words, the debtor gets to keep her residence, and the lender gets a relatively quick payoff of the lion's share of principal.
In summary, many lenders simply shrug off the junior trust deed position unnecessarily. Chapter 13 treatment of a junior lien on the debtor's home with even minimal equity, though, does not have to be a binary, debtor-gets-it-all proposition.
This post was written by attorney Rick L. Knuth