If you have a second mortgage on your home, a Chapter 13 bankruptcy filing could possibly help you get rid of the debt. Whether or not you can depends on various factors, including the home's value. Before filing for bankruptcy, here is what you need to know about your second mortgage.
When Can You Get Rid of a Second Mortgage?
In a Chapter 13 bankruptcy filing, it is possible to get rid of a second mortgage through a lien strip. A lien strip basically removes the second mortgage by converting it to unsecured debt.
An unsecured debt is one that does not have the security of collateral. In this instance, your home would be removed as collateral, which would leave the second mortgage as unsecured. Unsecured debts are typically discharged or reduced in a bankruptcy.
In order for you to qualify for lien stripping, your home's value must have declined to the point that it is no longer secured by the amount of equity you have in your home.
For instance, if the remaining owed on your home is $200,000 and the value of your home is $175,000, a second mortgage of $50,000 would not be covered. Only $175,000 of the first mortgage is covered. The second mortgage would then become unsecured.
How Do You Strip the Mortgage?
The first step in lien stripping is to have your home's value assessed. An appraiser can provide you with the value of your home. Depending on the state in which you live, you will either have to bring an adversary proceeding yourself or wait for the lender to do so.
The adversary proceeding is a hearing in which you and the lender have the right to argue whether or not the debt should stand. In this instance, you could provide the court with the appraisal you have received, evidence of what is owed on your first mortgage, and the remaining amount owed on the second mortgage to show that you are entitled to drop the debt.
It is important to note that the court could possibly side with the second mortgage lender and require you to pay back the amount that is owed. If that happens, the debt can be included in your repayment plan for the other debts left in your Chapter 13.
Consult with an attorney from a firm like Gruber & Associates, PC to determine whether or not lien stripping is an option in your case.
