Sometimes a debtor’s family wants to help out by paying off one or more of the debtor’s obligations. One of my clients stated that he owns a relatively small home subject to two mortgages. The first mortgage is payable to a private party from whom he purchased the home. The second mortgage is payable to a bank. The client cannot afford both mortgages because his business has been generating less income. The client’s brother wants to help him by paying off the first mortgage to the private seller.
I told him that he would be in better position legally if his brother bought the first mortgage note rather than paying it off. His brother would have the ability to foreclose the acquired first mortgage and strip off the junior second mortgage. Although the client would still be personally liable to the second mortgage, he would be in a much better negotiating position with the second lender to modify or discount the second mortgage. Mortgage lenders are more likely to discount the payoff amount if they believe the purchaser is a third party investor not related to the debtor. Set up a legal entity, such as an LLC or corporation, to serve as the prospective debt purchaser.
In general, people who want to assist family member debtors with their mortgage debt should consider buying debt and mortgage rather than paying off the debt. The purchased security interest can be used to shield the debtor against junior or future incurred debts.