If your home has actually gone down in value since you bought it, you may be feeling sick to your stomach right about now. After all, one of the reasons you bought the property is so it would be an investment.
Are you so far upside-down on your property that you can’t justify the mortgage payments? Has your neighborhood gone way down in values for one reason or another? If your house is siphoning money, a Chapter 13 bankruptcy may help you eliminate your second mortgage through the process of “lien stripping.”
Lien stripping, what is that? It’s a fantastic Chapter 13 tool that allows homeowners who have negative equity in their house to rid themselves of their junior liens for their second and third mortgages.
Here’s how it works: When your lien is “stripped,” the bankruptcy court takes your second or third mortgage and converts it to unsecured debt. You see, if you don’t do this and you continue to owe the lender for the junior lien, if you miss your payments, they can foreclose on your home.
In contrast, if you file a Chapter 13 bankruptcy, the second and/or third mortgage is converted to secured debt to unsecured debt, just like credit card or medical debt.
Not just any homeowner can strip their second or third mortgage, they first must meet certain requirements. They can only strip a junior lien if the amount on the first mortgage exceeds the home’s fair market value.
For example, if your house is worth $200,000, and you have a first mortgage for $250,000 and a second mortgage for $50,000, then you’re in the clear. But if your house is worth $200,000 and your first mortgage is $175,000 (less than what the house is worth), you wouldn’t qualify for a lien stripping.
On the other hand, if you have three mortgages and your first mortgage is more than what your house is worth, with a Chapter 13 bankruptcy you could literally strip those second and third mortgages.
If the value of your home exceeds the value of your first mortgage, but not the combined balance of your first and second mortgages, only the third mortgage can be stripped.
How is this possible?
When you file for bankruptcy, your first mortgage is given first priority while your second mortgage is treated as a nonpriority unsecured debt. Similar to other unsecured debt, such as credit card debt, you don’t have to pay off the debt outside of your bankruptcy repayment plan.
Rather, you pay a portion of the unsecured debt (often a very small amount) through your Chapter 13 repayment plan. Once the plan is complete, anything left over from the second mortgage is discharged, or otherwise erased. Doesn’t that have a nice ring to it?
Are you interested in learning more about mortgage lien stripping? If so, don’t hesitate to contact Dethlefs, Pykosh, Shook & Murphy Law.