If a homeowner takes out a second mortgage loan on their home, or even a third mortgage, those loans are considered “junior” in priority to the first mortgage, which is generally taken out when the home is purchased.
In this week’s post, we will explore this helpful technique for homeowners seeking relief in Chapter 13 bankruptcy.
A mortgage is a loan that is secured by the real estate and the house on the land, and is therefore designated a “secured debt.” Because the debt is secured, if you fail to pay your mortgage payments, the lender may choose to sell your home through the foreclosure process.
Lien stripping is the practice of “stripping”, or removing the lien from your junior mortgage, leaving only the debt owed. The mortgage lien(s) that have been stripped are then reclassified as unsecured debt for the purposes of the bankruptcy.
When the mortgage debt is re-classified as unsecured, it then becomes included in the Chapter 13 bankruptcy, and receives the same treatment that is proposed for all of the unsecured creditors, such as medical bills, credit cards and payday loans. Depending on your income and the assets you own, unsecured debt may not be paid at all, may be paid in part, or may be paid in full, through the Chapter 13 plan. Once the Chapter 13 repayment plan is completed, you receive a discharge of any remaining amounts owed on your unsecured debts.
Further, the lien strip is accomplished by an adversary proceeding which is filed soon after your bankruptcy case. Thus, relief from making your junior mortgage payments comes rather quickly.
There are important requirements that must be satisfied to find mortgage relief via lien stripping.
A homeowner must owe more on the first mortgage than the value of the home (commonly called “underwater”). For example, if a homeowner has a first mortgage with $200,000 owed, and a second mortgage with $50,000 owed, and the home’s value is $185,000, the second mortgage lien may be stripped, as there is no value for the second mortgage to “attach” to. However, if the home’s value is $201,000, lien stripping is not an option.
Chapter 13 bankruptcy is a useful and frequently chosen form of bankruptcy for those still earning a living, but who cannot afford to pay all of their debts. It is a valuable resource for homeowners facing foreclosure, or repossession of a vehicle, as it allows them to keep their property while catching up any delinquent payments on their mortgage through a three to five year Chapter 13 repayment plan.
Working together with an attorney can make a significant difference when reviewing your financial decisions. Talk with one of our bankruptcy attorneys today, and we can discuss options specific to your unique needs.
*This article is very general in nature and does not constitute legal advice. Readers with legal questions should consult with an attorney prior to making any legal decisions.
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