Expert: Mark J. Markus- California Bankruptcy Attorney - 9/25/2009

Question
QUESTION: Our first mortgage on our 2nd property (Rental, but currently unoccupied)including back- payments is $345,000. My 2nd mortgage (equity credit line) is 80,000. Can I strip my loan down to 300,000 (the current market value)? Do I have to pay this whole amount within 3-5 years of payment plan? . Should I pay an interest on the amount owed during this period?  Would the rental income contribute to bringing down the $300,000? Thank you Mr.Markus.

ANSWER: Under the facts as you've presented them, you should be able to eliminate the lien of the 2nd mortgage, and you can possibly strip down the first to $300,000, but you would then likely have to pay off that $300,000 over the course of the Plan (a maximum of 60 months).

Also, bear in mind that if your total secured debt on all your properties is over $1,010,000, you are not eligible for Chapter 13 (you may be able to exclude the under-water 2nd on your rental property from that analysis, but then it gets counted towards the UNSECURED debt limit of approximately $337,000. (11 U.S.C. 109(e))

http://www.bklaw.com/

---------- FOLLOW-UP ----------

QUESTION: Thanks. An insightful and careful answer. If no interest payment is required on the $300,000 during the plan, the the rental income may be applied to the loan and reduce the amount owed from $300,000 to a lower amount (building up equity) with the possibility of refinancing and paying back the loan within the 5 year plan. Is this a feasible plan? Thank you again for your helpful feedback.

Answer
I'm not sure I completely understand your question.  I'm sure the mortgage lender has an assignment of rents clause in their deed of trust, so the rental income probably must be used to pay on the mortgage.  It's part of your overall income anyway, so it would need to be allocated towards that.  Amortizing the $300,000 over 5 years IS refinancing.