Eliminate a Second Mortgage

Eliminate a Second Mortgage with Chapter 13

If you’re trying to decide which approach to bankruptcy is best for you, the prospect of getting rid of a second mortgage can be a great reason to consider filing Chapter 13.

Traditionally the most common reason a person filed Chapter 13 bankruptcy was to provide time and the breathing space to catch up with delinquent mortgage payments in an orderly way. But with real estate values down considerably throughout the country and, in particular, in the Monterey Bay area, an increasingly common reason to file Chapter 13 is to strip an “underwater” second (or third) mortgage/lien.

There is a big difference in how certain debts are treated in Chapter 7 and in Chapter 13. In Chapter 7, for most intents and purposes, secured debts pass through unaffected. If you have two mortgages when you file Chapter 7, you will most likely have two mortgages when you finish your case 3 or 4 months later. You cannot do a lien strip in Chapter 7.

By comparison, in Chapter 13, secured debts generally are paid in full over a 3 to 5 year period. But unsecured creditors are often paid a nominal amount – in many cases zero percent. If a debt can be classified as unsecured, the debtor can likely eliminate it with minimal payment.

Mortgages are considered a classic secured debt, because the creditor has a lien on the home or other real estate to secure payment. In other words, if a person stops making their payments the bank can take steps to foreclose the property and sell it at auction. But the Bankruptcy Code has a special definition of secured debts. Under Section 506, a debt is secured only to the extent of the value of the collateral. Currently, however, first (primary) mortgages cannot be crammed down to the value of the property. So while Chapter 13 can help you catch up with a first mortgage if you are behind, it cannot reduce the total amount required to pay off the mortgage debt.

Second mortgages (junior liens) are different, however. If the value of the property is less than the balance owed on the first mortgage, the second mortgage has no remaining value to claim. This is what is referred to as being “upside down”.  In this situation, the second mortgage can be classified by the bankruptcy court as being wholly unsecured. This means the debt to the second mortgage holder, like any other unsecured debt, can be discharged. This is what is meant as “lien stripping”.

Call today to find out if you qualify to have your second (or third) mortgage stripped. Call (831) 224-3199.