In today’s economy, your mortgage debt can be an overwhelming expense. For those with first and second mortgage loans, you can try to negotiate with your lenders. However, loan modifications can be slow and there is no guarantee that your proposed home loan modification will be approved by your lenders, leaving you in a deeper financial hole. Bankruptcy may be the best option to get you back into strong financial shape – and get your mortgage debt reduced too.
A bankruptcy can help you settle a second mortgage debt. In either a Chapter 13 or Chapter 11 plan, you may be able to eliminate a second mortgage if it is wholly unsecured. What does it mean to be “wholly unsecured”? When the value of your home is equal to or less than what you owe on your first mortgage, your second mortgage is considered wholly unsecured. For example, assume you have a $300,000 first mortgage and a $100,000 second mortgage. The current value of your home is $250,000. The second mortgage is wholly unsecured because the value of the home does not exceed the first mortgage lien. Because of the upheaval in financial and real estate markets, it may be likely that your second mortgage is wholly unsecured. If there is a third mortgage on the property, you may also be able to eliminate that lien on the same “wholly unsecured” basis described for second mortgages. This bankruptcy process is commonly referred to as “lien stripping” and can save you hundreds of thousands of dollars!
In order to eliminate your wholly unsecured second mortgage in bankruptcy, you should seek a knowledgeable bankruptcy expert to guide you through the process. In addition to filing your petition and complying with bankruptcy rules, that expert can file a motion to value collateral, the collateral being your home. The second mortgage lienholder must be properly notified of your motion and must have an opportunity to object to the motion. A bankruptcy expert can help you through any hearing determining the current value of your home – a critical step to eliminating a wholly unsecured second mortgage. When your motion to value collateral is granted, your second mortgage will be an unsecured debt, treated in the same priority as a credit card debt. Generally, such debts receive less in a Chapter 13 or 11 plan than other claims for priority or secured debts. And the best part is when you complete your bankruptcy plan payments, your wholly unsecured second mortgage will be gone!
You might ask yourself – what’s the catch? This seems too good to be true. There is one catch – you need to complete all your Chapter 13 or Chapter 11 plan payments under the terms specified under your plan. If your bankruptcy case is dismissed without a discharge for any reason or your get a discharge without completing all plan payments, you will lose the benefit of lien stripping, and your second mortgage will remain attached to your home. Moreover, all your other debts spring back too. So if you are considering filing bankruptcy, you need to be committed to your required plan payments over the life of your bankruptcy plan (typically three to five years.) If you have a steady income and can commit to making all your plan payments, you not only get the benefit of stripping your second mortgage, you also have a fresh start with a discharge of many of your pre-bankruptcy debts. So contact a knowledgeable bankruptcy expert to discuss your options and get your financial fresh start today.