One of the benefits of a Chapter 13 bankruptcy is the ability to pay mortgage arrears, past due house payments, through a Chapter 13 payment plan. But, can second mortgages be removed in a Chapter 13 bankruptcy? Many people have multiple liens on their house, because they have taken out a second or a third mortgage. Often times, people take out a subsequent loan against a house that is already mortgaged, in order to pay for large expenses, such as buying a second house, or paying for a wedding.
Second mortgages are common because they will either come in the form of a home equity loan, or a home equity line of credit – each cater to different types of spending habits. With a home equity loan, borrowers receive a lump sum loan and pay back in fixed monthly installments. With a home equity line of credit, borrowers can receive a fund through a Visa card and use it as needed, and start to pay back the loan after a certain amount of years. The problem with second or third mortgages, is that these type of mortgages can be quite expensive. Moreover, second mortgage and third mortgage interest rates are typically higher than the interest rate on a first mortgage.
In a Chapter 13 bankruptcy, second mortgages and third mortgages can be removed through a process called “lien stripping.” Lien stripping is a procedure that removes junior liens on a house, in a Chapter 13 bankruptcy. Junior liens are liens that were subsequently created after a first mortgage on a house, such as a second mortgage or a third mortgage. While “lien stripping” may sound like a dream come true, there are certain requirements that need to be met before a junior lien may be removed in a Chapter 13 bankruptcy. Second mortgages or third mortgages can only be removed if the total mortgage on the house is greater than the fair market value of the house. If you have a first mortgage on a house, and the value of that first mortgage fully secures the fair market value of the house, then the subsequent mortgage(s) - second and third mortgages - become unsecured, and the bankruptcy court can strip, or remove them. Likewise, if it takes two mortgages to fully secure the fair market value of a house, then only the third mortgage can be left as unsecured and be removed. A mortgage can also partially secure a house. This comes into play when a junior mortgage (for instance, a third mortgage), causes the total mortgage on the house to be greater than the fair market value of the house; however, by removing that third mortgage, the house would not be fully secured. Therefore in this situation, the junior mortgage would not be able to be removed or stripped.
How does the removal of a second or third mortgage affect your Chapter 13 plan payment? The effect is, the junior mortgage that is removed, will be treated the same as any other nonpriority, unsecured debt, such as credit card debt or medical bill debt. While this increases the total amount of unsecured debt you have in your Chapter 13 bankruptcy, because you are only paying a small portion of your unsecured debt through the Chapter 13 plan, your Chapter 13 plan payments will still be quite low. After you complete the Chapter 13 bankruptcy in 3-5 years, the stripped junior mortgage(s) will simply be wiped out, or discharged.
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To see whether lien stripping is possible for you, or to get started on removing junior mortgages on your house in a Chapter 13 bankruptcy, you should consult with an experienced bankruptcy attorney. See us at LifeBackLaw.com!
