Lien Stripping: Removing a Second Mortgage in Chapter 13 Bankruptcy

In the wake of the 2008 housing bubble many homeowners are facing difficulties with refinancing, mortgages and foreclosure. In New Mexico 12.9% of homeowner’s mortgages are underwater, meaning homeowners owe more on their home than their home is worth.  Underwater mortgages are a result of depressed home value and have become a difficult problem for both homeowners and lenders. However, there are options for homeowners with second and even third mortgages on their homes.

Lien stripping for home mortgages underwater:

In the wake of the 2008 housing bubble many homeowners are facing difficulties with refinancing, mortgages and foreclosure. In New Mexico 12.9% of homeowner’s mortgages are underwater, meaning homeowners owe more on their home than their home is worth. Underwater mortgages are a result of depressed home value and have become a difficult problem for both homeowners and lenders. However, there are options for homeowners with second and even third mortgages on their homes.

Mortgages Under Chapter 13 Bankruptcy

Under Chapter 13, mortgages on your principal residence cannot be modified. However, unsecured debt, such as second and even third mortgages may be modified, if they qualify for lien stripping.

What is Lien Stripping?

Lien stripping is a tool available to homeowners going through Chapter 13 Bankruptcy that allows homeowners to eliminate second mortgages on their homes. It works by converting a secured debt, such as debt backed up by your property, into an unsecured debt, similar to credit card debt. This can only occur if a second mortgage is not backed up by property. This occurs because the amount of the first mortgage is greater than the value of the property. For example, your house is worth $150K and you have a $200K first mortgage and a $50K second mortgage. The amount of your first mortgage is greater than the value of your property, meaning that your second mortgage is unsecured and can be modified under Chapter 13 bankruptcy law.

How Does Lien Stripping Work?

The first step in eliminating a second mortgage is to make sure that the second mortgage is unsecured. This can mean having property appraised in order to determine that the property is worth less than the amount of the first mortgage. If the value of the property is less than the amount of the first mortgage then the second mortgage may be eligible for elimination.

Your attorney must file a separate motion in bankruptcy court to value the property and have the court rule that the second or third mortgage is unsecured.  Once a second mortgage is determined to be unsecured it is treated like any other unsecured debt under Chapter 13 bankruptcy. Payments  are made only through the bankruptcy payment plan, not through the mortgage itself. If the payments are completed through the plan, which are usually a fraction of the actual debt, then the mortgage is eliminated. Payments to the mortgage stop once a homeowner files for Chapter 13, but the mortgage does not completely disappear until the bankruptcy payment plan is completed.

Professional Help

The attorneys at Albuquerque Business Law can help determine if lien stripping and eliminating your second mortgage is a good fit for your financial situation. We can help you weigh the benefits and potential problems of filing for Chapter 13 bankruptcy and make sure your second mortgage qualifies before you file. Call or click with any questions you have about mortgages, bankruptcy and lien stripping. Our attorneys are happy to answer any questions you may have.

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