Can you eliminate a second mortgage in Chapter 13?

One of the most powerful weapons in the Chapter 13 arsenal is the ability to eliminate second mortgages commonly referred to as “lien stripping”.

Stripping the lien of a second mortgage holder relieves the homeowner of the obligation to make two (sometimes three) mortgage payments and often discharge the entire balance of the second mortgage.

Consider the following scenario:

Hillary and Bill purchased their home in 2004.  They paid $140,000 for the property and their monthly mortgage payments were set at $800.  In 2007,  Bill became unemployed and the family had to survive on Hillary’s income alone.  In 2008, Hillary was hospitalized briefly and lost time from her work.  Bill found work making half the amount he was making when they bought their house. The couple fell behind in their monthly bills.  After using all their savings, they applied for a loan with a company they heard about on television.  They borrowed $50,000 from the company who insisted on taking a second lien or mortgage on Hillary and Bill’s home.  Not having any other option, they agreed and signed the note obligating them to a second mortgage payment of $300 each month.  It is now 2012 and both Hillary and Bill are in lower paying jobs and can no longer afford both mortgage payments and their household expenses.  They have tried selling their home but the value of their home has now dropped to $135,000 and they cannot sell the home for enough to pay off both mortgages.  They do not want to lose their home but think they have no other option but to give it up.

Hillary and Bill may be able to file Chapter 13 bankruptcy, keep their home and, through the lien stripping provisions of the bankruptcy code, wipe out the second mortgage.  This would allow the debtors to still keep their house and eliminate those second mortgage payments each month and even discharge the balance.  Not every mortgage lien can be stripped, however.  In order to take advantage of Chapter 13’s lien stripping provisions, the property must not have any equity over and above the first mortgage.  In the above example, since Hillary and Bill’s home is now worth less than the 1st mortgage, the subsequent mortgages could be changed from a secured debt (one that is secured by the home) to an unsecured debt capable of being discharged by lien stripping.

Although litigation is required for lien stripping, poles are not.


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