About 25% of homeowners in the U.S. have a property that is worth less than the mortgage. In these tough economic times, people have been walking away from their homes. Even if you are behind on your mortgage and upside down on your home, you may not need to resort to such extreme measures. There are some strategies that you can use which may help you keep your home even if you have a second mortgage on it or a home equity line of credit (HELOC).
If you could wipe off that excess debt over and above the amount of your first mortgage, then it could help to reduce the financial pressure you may be experiencing. There are certain bankruptcy laws that allow for a person to get second mortgages modified or eliminated and liens on your property from a second mortgage eliminated.
Stripping the Mortgage
If the value of your property falls below the loan amount, creditors may modify the loan to reduce the balance of the loan to equal the current value of the property. In a Chapter 13 bankruptcy proceedings when a judge removes the second mortgage, it is called "stripping" the lien, a "cram down" or "strip down".
The strip allows a debtor to stop paying the second mortgage (or HELOC or other lien) and treat it as a general unsecured claim. When bankruptcy proceedings allow the discharge, the lien must be released.
According to the Bankruptcy Code, a lien is only a secured claim to the extent there is value in the asset to which it attaches. When the property is worth less than the first mortgage then the second mortgage is essentially an unsecured lien. In a foreclosure proceeding, the second mortgage holder might have no equity against which to assert a claim. Once the first mortgage (senior lien) has been deducted from the property's current market value, then the remaining liens can be stripped off in Chapter 13 bankruptcy proceedings.
It's important that before starting bankruptcy proceedings, that your home value be properly calculated. If the value is actually higher than what you tell the courts, then the second could be partially secured. This situation is what is sometimes referred to as "under secured". If the second mortgage is even partially secured, the court will deny the motion to value the second mortgage at zero - wholly unsecured. This may prevent you from having the second mortgage lien stripped from the property. It is a good idea to get an accurate appraisal of your property before seeking bankruptcy relief to wipe away a second mortgage or have a lien securing a second mortgage stripped.
Liens generally survive a bankruptcy discharge, so a lien strip requires that you file a Motion to Avoid Lien with the Court and have it granted. Then you have to make all of the required payments under your reorganization plan and receive a discharge.
Negotiating with the Lender
Another way to go about this is to hire a good attorney who can negotiate with the lender and avoid Chapter 13 bankruptcy altogether. By way of example, a couple had a $120,000 second on their home. Their first mortgage was worth less than the house's fair market value. They were going to walk away from the house if they had to keep paying both mortgages. They wanted to keep the house if they could get rid of, strip, the second mortgage. Together they had $15,000 in credit card debt.
They stopped paying the second mortgage. They hired an attorney to make sure they did not get foreclosed on and to negotiate with the lender. The lender agreed to accept payment of only $15,000 to satisfy the second mortgage. They also allowed the debtors to repay the $15,000 over three years in installments and once paid the obligation would be satisfied in full.
This couple was able to strip their second mortgage without having to go through Chapter 13 bankruptcy. There are some advantages to this. They did not have to pay trustee fees (about 10%) for filing bankruptcy, their was less damage to their credit and over the long run they paid back a smaller amount of money to the lender than they would have if they had paid through a bankruptcy plan. An experienced bankruptcy attorney will be able to advise you regarding whether an option like this one or a Chapter 13 lien stripping approach might be right for you.
Who Is Eligible
In order to be eligible for mortgage stripping, your home must have depreciated in value so much so that it is now worth less than the first mortgage. If you attempt to strip your second mortgage in a bankruptcy, you should consult with an experienced attorney to discuss your options before taking any action. It is not a simple process, and if you file wrong, you could mess up your chances of obtaining a bankruptcy discharge. Debtors handling complex bankruptcy issues like this one frequently make their situation worse than before seeking bankruptcy or foreclosure relief.
Southern California Law Advocates, PC helps clients file for bankruptcy by helping them understand their rights and options so that our clients can make an informed decision. Your family residence is more than a building - it is your home. Call us today to see how we might be able to help you protect your home at 1866-337-7220.