Lien Strips – Removing “Underwater” Second Mortgages in Bankruptcy and How it Could Help You Make Your Home More Affordable

home values down

Chapter 13 bankruptcy is a powerful debt relief remedy. It allows consumers to enter into a court protected debt reorganization of your debts over a period of time (normally, 36-60 months total).

Chapter 13 debt reorganization plans can, for example, force the mortgage company to accept past-due mortgage payments. This is extremely helpful for consumers who have fallen behind on their home mortgage, but now have the means to get caught up, if given more favorable terms than the mortgage company can offer. This is true even if the mortgage company has already filed a foreclosure action against the homeowner.

Today’s post will examine another aspect of Chapter 13 debt relief – the ability to completely void a second mortgage (“lien stripping”). On second mortgages (junior liens, HELOC liens, etc.) consider if the value of your home (personal residence) is less than the balance due on the first mortgage. If this is true, you can probably strip off the second mortgage and treat the unpaid balance as an unsecured claim. But you must establish that there is not one single dollar of house value to “secure” the second mortgage, AND you must stay in the Chapter 13 until its completion. If you don’t get your Chapter 13 discharge, then the mortgage is not avoided.

Your attorney must provide for the treatment of the second mortgage in your Chapter 13 Plan. In addition, your attorney must file papers in the bankruptcy court which asks the Court to grant the avoidance of the second lien. The second mortgage holder is entitled to specific and repeated notices of your intent to avoid the second mortgage and treat them as an unsecured creditor.

After the motion is granted, the second mortgage is no longer treated as a secured creditor. It is lumped in with all of the other unsecured creditors, and paid along with them over the course of the plan. Unsecured creditors are not always paid 100 percent of their debts. But your Chapter 13 discharge means that most all consumer debt is discharged as if then entire debt was paid.

This can be a tremendous advantage to the homeowner struggling with debt. Not only are the relieved of the obligation to pay the full amount to the creditor, the avoidance of the second mortgage can put the homeowner in a much more realistic position to actually pay the house off. In other words, a deeply underwater home can be brought closer to the surface of the water.

There are many nuances to this proceeding. All owners of the title must file, you can’t strip off a mortgage as to non-filing owners. Key documents include a payoff statement to determine the balance due to the first mortgage, mortgage statement (can be sufficient if the value is not even close, or can provide additional notice addresses), original note and mortgage, title search to make sure that there are no additional liens, home owners association dues and assessment statements.

Unfortunately, the Supreme Court has said that only Chapter 13 debtors, not Chapter 7 debtors. To read more about the Supreme Court’s decision explaining why, click here. But if you are in presently in a situation where the value of your home does not exceed the first mortgage, and your second mortgage is dragging you down even more, give me a call at 216-642-8234. We can schedule a consultation to discuss whether Chapter 13 can help you dig out of a falling housing market, keeping your home but paying less to stay there.

Reading this article does not create an attorney-client relationship. Do not take action without an attorney’s advice based upon what you have read here. Blake Brewer is a federally designated Debt Relief Agent pursuant to the U.S. Bankruptcy Code, helping consumers get a fresh start by filing for bankruptcy debt relief.

You can leave a response, or trackback from your own site.

Leave a Reply