Second Mortgage Lien “Stripping” in Chapter 13 Bankruptcy.

Posted on Feb 16

 While the United States Bankruptcy Code does not allow debtors to modify first mortgages in bankruptcy, second mortgages can be modified or “stripped” by filing chapter 13 bankruptcy. This works as follows:

First, you must be “underwater” on your first mortgage. This means that the value of your home is lower than the balance of your first mortgage. If an appraisal confirms that you are underwater on the first mortgage, the second mortgage is considered unsecured and is therefore eligible to be modified or “stripped” through bankruptcy

With the help of a bankruptcy lawyer, a Chapter 13 plan would be drafted and filed with the Court. Once the plan has been filed, your bankruptcy attorney will file what is called an adversary proceeding, which is a lawsuit filed in the bankruptcy court. Your second mortgage lender would be the defendant in this lawsuit. Attached as evidence with the lawsuit would be a real estate appraisal demonstrating that you are underwater on your home. In most cases, a good appraisal will prevent the lender from contesting the mortgage modification.

At the end of the process, the lien of your second mortgage lender will literally be stripped from your home. The second mortgage will then be paid as an unsecured debt through the chapter 13 plan, often at pennies on the dollar. Keep in mind that you must finish the chapter 13 repayment plan in order to achieve a permanent second mortgage modification. If you do not finish your chapter 13 repayment plan (i.e. make all of your chapter 13 plan payments), your bankruptcy will be dismissed and you would then be responsible to pay the balance on the second mortgage.

For most consumers, lien stripping of a second mortgage through a chapter 13 bankruptcy results in much lower mortgage payments and can fend off a foreclosure.

The Law Offices of Philip Duda is always available to assist you in the preparation of your Chapter 7 or Chapter 13 bankruptcy matter. Feel free to contact us for your free, no obligation consultation with a bankruptcy lawyer. We provide bankruptcy relief to consumers in the Greater Phoenix area as well the entire state of Arizona.

Categories : Legal Blog

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