Bankruptcy and Lien Stripping
The Truth About Your Second Mortgage in Bankruptcy
Many individuals considering bankruptcy have questions about how their second mortgage. Typical questions include: “Will my second mortgage be discharged?” and “Will I be stuck with a second mortgage forever?” There is a lot of incorrect information circulating online regarding this issue. There are many common misconceptions regarding second mortgages in bankruptcy. This article provides the basic information regarding second mortgages and the bankruptcy process. It is important that every home owner understand their rights concerning the adjustment and potential discharge of any second mortgage or other lien.
The Second Mortgage
For purposes of this article, a second mortgage refers to most types of liens on your home including a home equity line of credit. Many clients come to us with false beliefs that they will not be eligible to have a home equity line of credit discharged in a Chapter 13 bankruptcy because it is not a “mortgage” per se. However, for bankruptcy purposes, a home equity line of credit will most likely be treated as a traditional second mortgage and in some cases an unsecured debt.
In today’s recession, many home owners have first and second mortgages. During the recent real estate “boom,” individuals took out second mortgages under the belief that their home value would only continue to rise. In today’s world, however, many first mortgage are underwater. In a bankruptcy, a second mortgage may be treated as unsecured debt when the value of the home is less than the amount owed on the first mortgage. A second mortgage identified as unsecured debt will be treated much the same way as credit card debt, personal loans, and other typical unsecured debt. This means that your second mortgage may be forgiven in a bankruptcy. This is called lien stripping or a mortgage strip and many individuals in the downturn economy are utilizing this bankruptcy tool to help them get back on their feet.
In order to be take advantage of the lien stripping process, a debtor must file under the Chapter 13 reorganization plan (or in some cases a Chapter 11). In a Chapter 13 bankruptcy, the individual’s debt is reorganized and the debtor makes monthly payments to the court to repay creditors at more favorable terms. Often the monthly payment obligations in the Chapter 13 are less than the second mortgage payments. This allows debtors to remain in their home without having to pay the second mortgage. At the end of the bankruptcy payment plan, you may own your home subject only to the first mortgage.
Free Consultation with Utah Bankruptcy Lawyer
If your second mortgage is part of your debt problems, call one of our Utah Bankruptcy Lawyerstoday to find out if you are eligible for a Chapter 13 bankruptcy and lien strip. We offer free consultations, call now at 801-810-8825.