When filing a Chapter 13 bankruptcy, you may be able to strip a second mortgage if there is no equity in your home after the first mortgage. In this instance, the second mortgage can be treated similar to any other unsecured lien (like a credit card debt) and the debtor could end up paying little or nothing on the balance. The existence of a first and second mortgage loan is fairly common after the proliferous toxic lending the occurred from 2005-2007. It was common during this time to sell homeowners on both mortgages at once even though, added together, they often totaled more than the purchase price of the home. In the years following, home values were suddenly not anywhere close to what they used to be leaving many homeowners stuck with two loans drastically exceeding the value of their home with little hope it would even out in the near future.
The Trouble with that Second:
- It makes it difficult to get a loan modification. Don’t get me wrong…it’s always difficult to get a loan modification. It’s just MORE difficult when you have a second.
- This makes it harder for homeowners in trouble to avoid foreclosure.
Getting Rid of the Troublesome Second:
- When “eliminating the second mortgage” through bankruptcy, you are actually converting the secured debt of the second mortgage to an unsecured debt and then treating it in accordance with bankruptcy law. Some refer to this as stripping the lien or the second.
- Once the debt is converted to unsecured, it is treated as any other unsecured debt, which often results in little or no payments being made towards the debt throughout the course of the Chapter 13 bankruptcy reorganization plan.
The Benefits of Stripping the Second:
- The monthly payment that is required for the second is greatly reduced, which frees up cash flow to pay on the first mortgage and save the home.
- Upon the sale of the home, the amount of money necessary to “pay it off” is now lower. In some cases, this is the only way the homeowner could sell the house as they owed far and above what it was worth when the second was in place.
If you have questions regarding how your second will be handled during the course of a Chapter 13 bankruptcy or determining whether or not Chapter 13 bankruptcy is the best choice for you, please get in touch with the experienced southern California bankruptcy attorneys at Westgate Law.