REMOVING A SECOND MORTGAGE IN BANKRUPTCY:
GUIDE FOR HOMEOWNERS Understand How You Can Remove a Second Mortgage On Your Property Through Chapter 13 Bankruptcy
BRIAN V LEE
BANKRUPTCY ATTORNEY IN WASHINGTON DC AND VIRGINIA
Homeowners who are having difficulty making their house payments should be aware of the rules regarding Chapter 13 bankruptcy and home mortgages. While a home mortgage is generally not dischargeable in bankruptcy and the mortgage must be paid as required for a homeowner to retain possession of the home, there is an exception that makes removing a second mortgage in bankruptcy possible. The exception is not available in all situations and is possible only for second mortgages or additional non-
Homeowners who are having difficulty making their house payments should be aware of the rules regarding Chapter 13 bankruptcy and home mortgages.
primary mortgages on a home. Chapter 13 debtors who are going through the bankruptcy process should speak with an experienced bankruptcy attorney for assistance in determining whether Chapter 13 is a possible option to remove a second mortgage on their property.
THE PROCESS OF REMOVING A SECOND MORTGAGE IN BANKRUPTCY Removing a second mortgage in bankruptcy is completed through a process called lien stripping. Lien stripping is an option in situations where you have a second, third, fourth or other non-primary mortgage and where you owe more on the home’s primary mortgage than the house is worth. For
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example, if you have a home worth $150,000 and you have a $175,000 first mortgage and a $25,000 second mortgage, then your primary mortgage exceeds the reasonable market value of your home and lien stripping is an option in your chapter 13 bankruptcy. As a part of your bankruptcy filing, you would need to demonstrate that the home is worth less than the value of the primary mortgage and that there is no collateral for the secondary mortgage holder. Essentially, this means that the home does not actually provide security for the second loan. Provided you are able to demonstrate this, the lien would be stripped from the second mortgage and the debt owed to the second mortgage lender would be considered unsecured debt.
UNDERSTANDING LIEN STRIPPING Lien stripping is possible because a second mortgage is not actually secured debt if the home is worth less than the value of the primary mortgage. If a home worth $150,000 with a primary mortgage of $175,000 was foreclosed on because of non-payment of the second mortgage, the sale of the home would generate only the $150,000 that the home is worth.
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The first mortgage holder has a primary claim on the proceeds of the sale of the home. In other words, the first mortgage holder would receive the full $150,000 that the home sale generated. The second mortgage holder would receive nothing in a foreclosure sale. This means that the home is not guaranteeing the second mortgage debt. There is no collateral for the second mortgage loan because there is no asset the second mortgage lender could sell in order to generate funds to repay the loan. Lien stripping simply recognizes this reality and reclassifies the second mortgage debt as the unsecured loan it actually is. This is referred to as lien stripping.
THE IMPACT OF LIEN STRIPPING
When a second mortgage is reclassified as unsecured debt in the process of lien stripping, this has many significant benefits to a debtor homeowner who is trying to save a home from foreclosure or who is interested in removing a second mortgage in bankruptcy.
When a second mortgage is reclassified as unsecured debt in the process of lien stripping, this has many significant benefits to a debtor homeowner who is trying to save a home from foreclosure or who is interested in removing a second mortgage in bankruptcy.
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As unsecured debt, the second mortgage debt could be included in a chapter 13-repayment plan and the homeowner would be able to keep the home while paying back only a portion of the debt owed. Normally, in a chapter 13, mortgages must be repaid in full in order for the homeowner to keep the house, unless the mortgage lender agrees to a mortgage modification as part of negotiations separate from the bankruptcy filing. The homeowner is obliged to continue to pay the mortgage(s) in full because of the home acting as collateral. When the lien is stripped from a second mortgage and the debt is thus unsecured debt included in the chapter 13 repayment plan, there is no requirement that 100 percent of the debt be paid back. Instead, the second mortgage is treated just like credit card or personal loan debt. The debtor will create, with the help of a bankruptcy lawyer, a repayment plan that is scheduled to last for three to five years and that requires the debtor to make monthly payments to creditors based on his/her income and expenses. This payment plan will be approved and administered by the bankruptcy trustee and the debtor will need to make all payments as agreed. At the end of the three-to-five year repayment plan term, the remaining balance on the unsecured debts included in the plan will be discharged or forgiven.
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Essentially, this means by removing a 2nd mortgage in bankruptcy the debtor will be relieved of any further obligation to repay the second mortgage at the close of the repayment period. The debtor will keep his home provided that he has become and stayed current on his first mortgage. Lien stripping is one of the most beneficial aspects of a chapter 13 bankruptcy for debtors who are eligible to resolve their second mortgage debt using this technique. Debtors with a second mortgage or other non-primary mortgage on their homes should contact an experienced bankruptcy lawyer for help removing a 2nd mortgage in bankruptcy.
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About the Author Brian V. Lee Serving clients in the DC-metropolitan area since 2005, attorney Brian V. Lee is licensed in Virginia and the District of Columbia. He is also licensed to practice in Maryland federal and bankruptcy courts. Brian provides client-oriented legal counsel to businesses and individuals on a wide variety of complex legal and financial issues. He is a graduate of Rutgers University in New Jersey and George Mason University School of Law. About Lee Legal Lee Legal is a full service bankruptcy and litigation law firm with offices located in Washington, D.C. (DuPont Circle) and Virginia (Old Town Alexandria). Lee Legal provides skilled, comprehensive bankruptcy and litigation representation. Every client receives a free initial consultation. Lee Legal is a proud member of the National Association of Consumer Bankruptcy Attorneys, a national advocacy organization dedicated to the protection of the rights of consumer debtors in bankruptcy. Lee Legal is also rated by the Lead Counsel Program, designed to assist consumers in finding a pre-qualified, pre-screened attorney quickly and easily. Lead Counsel Members must pass a challenging certification process, which mandates peer recommendations, bar checks, and practice area experience. If you are facing financial difficulty or litigation, call (703) 879-2870 in Virginia or (202) 448-5136 in Washington, D.C. for a free consultation.
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