With the housing crises and the decrease in home values it may be likely that your house is underwater. Meaning you owe more on the home then what it is worth. If so, in a Chapter 13 bankruptcy you can get rid of your second mortgage, this is commonly called lien stripping.
Through a lien strip, the court allows you to take your second mortgage and convert it to an unsecured debt similar to credit cards and medical debt. This debt is discharged at the conclusion of your chapter 13 bankruptcy. There are several requirements that must be met before you can have the debt discharged and lien strip granted.
Must be in a Chapter 13
Some United States District courts allow for a lien strip in a chapter 7 however in the Central District of California (Orange County, Riverside, Los Angeles, and Santa Barbara) a lien strip can be done only in a Chapter 13. This may change with new case law, however at the time this is the rule most courts have followed.
In order to eligible for a lien strip you must be able to qualify for a chapter 13 bankruptcy under the chapter 13 bankruptcy rules. A chapter 13 bankruptcy includes a payment plan from three to five years. (http://oc-bankruptcylaw.com/bankruptcy-info/chapter-13-bankruptcy/). A chapter 13 is commonly used for debtors who have arrears on their home and want to stop a foreclosure, have unexempt property they do not want to liquidate or for individuals who do not qualify under chapter 7 means test (link: http://oc-bankruptcylaw.com/bankruptcy-info/chapter-7-bankruptcy/)
Mortgage Completely Unsecured
You can only strip your second mortgage and other junior liens if the senior liens on the property exceeds the home’s market value. For example let’s say you have a home in which the market value is $500,000.00. If you first mortgage is for $600,000.00 then your second mortgage and all other junior mortgages are unsecured and can be stripped. Let’s do another example, lets say your house market value is $500,000.00 but your first mortgage is $400,000.00 and your second is $50,000.00. In this scenario your second mortgage has a security in the home worth $50,000.00 and therefore the 2nd cannot be stripped.
How is the 2nd mortgage removed?
The second mortgage and other junior liens will be treated as non priority unsecured debt within your chapter 13. A portion of all unsecured debt will be paid through your chapter 13 plan. The portion that is paid is usually a relatively small amount. Once you complete the plan any amounts owed to the 2nd mortgage or any other junior liens will be removed along with the lien on the house. This is all done through motions filed with the court and documentation proving that the debt is unsecured.
If your Chapter 13 case is dismissed or converted to a c
hapter 7 you will be unable to remove the 2nd mortgage or any other junior lien. It takes careful planning from an experienced chapter 13 attorney to help make a chapter 13 plan that is feasible, draft the lien strip motion and help you through the process.