Can I Get Rid of my Second Mortgage if I File for Bankruptcy?

Some debtors may have heard through one source or another that it is possible to get rid of a second mortgage by filing for bankruptcy. While it may sound too good to be true, some individuals are, in fact, able to keep their homes while no longer being responsible for their second mortgages. This process through bankruptcy is called stripping a lien. Lien stripping is an option for people who have filed for Chapter 13 bankruptcy, and it allows people who are upside down (meaning your mortgage balance exceeds the fair market value of your house) on their house to get rid of their smaller liens such as second or third mortgages. This is only an option for people who are filing for Chapter 13 bankruptcy; you cannot strip a mortgage through a chapter 7 bankruptcy. Through a lien strip, the bankruptcy court essentially takes your second mortgage, which is a secured debt, (meaning your house is collateral for the loan, so the lender can foreclose on your property if you miss your payments) and converts it to an unsecured debt (just like a credit card debt). They do this by ordering the lender to remove their lien from the property.

You can only strip your second mortgage or other junior liens if the amount of the senior lien on the property exceeds the home’s fair market value. To break things down, if you have a first and a second mortgage on your house, your first mortgage balance must be more than what your house is worth to be able to qualify to get rid of your second mortgage. If you have three mortgages, then you can strip both your second and third mortgages if the balance of your first mortgage is greater than the value of your house. However, if your house is worth more than your first mortgage alone but not more than the combined balance of your first and second mortgages, then you can only strip your third mortgage.

As an example, let’s say you have a house that is worth $100,000, and you have a first mortgage with a balance of $150,000, and a second mortgage with a balance of $25,000. Because the fair market value of your home is lower than the balance of your first mortgage, you qualify to have your second mortgage stripped through a Chapter 13 bankruptcy case. To give an example showing what would happen if you also had a third mortgage, let’s add another mortgage to the example used above- you have a house worth $100,000 with a first mortgage of $150,000, a second of $25,000, and a third in the amount of $5,000. Because the first mortgage has a balance that is higher than the fair market value of your home, you would also be able to strip your second and third mortgages. However, if the value of your home was $160,000, and you had a first mortgage with a balance of $150,000, you cannot strip your second mortgage of $25,000 because you have equity in your home; the value of the home is higher than the value of the first mortgage. However, since the combined first and second mortgage balances ($175,000) exceed the fair market value of the home, you would be able to strip your third mortgage with the $5,000 balance.

The second mortgage (or other junior lien) you strip through your bankruptcy case is treated as a non-priority unsecured debt when you file your Chapter 13 bankruptcy case. Just like medical or credit card debt in Chapter 13, you do not have to make payments on this debt outside of your bankruptcy. Depending on your case, you may or may not have to pay a portion of this unsecured debt through your Chapter 13 plan. If you complete the plan, any balance that remains from the mortgage you stripped would be discharged, which means that it would be wiped out/you would not be responsible for paying it in the future.

What this means as far as payments go is that as soon as you file your chapter 13 bankruptcy case, you do not have to keep paying your second (or third, etc) mortgage. Your attorney would list in your plan that you are planning to strip those mortgages, and that would notify your trustee and lenders that you intend to no longer pay these. You will just need to make sure you continue to pay your first mortgage and plan payment to the trustee. However, the second mortgage lien technically will not be removed from your house until you complete your plan and receive a discharge. If your case gets dismissed before you complete your bankruptcy plan, your second mortgage lien will not be stripped.

It is important to speak with your attorney about stripping your second/third mortgages prior to filing your chapter 13 case. Because stripping liens is not an option for everyone who files for Chapter 13 bankruptcy, it is likely that you will incur more attorney fees than you would if you were not attempting to strip your liens. This process is considered an adversarial proceeding by the bankruptcy court which means that your attorney will need to attend hearings on your behalf, and put in a lot of work to help you no longer have to pay those debts. However, to many, it is worth spending a small amount to an attorney to get rid of tens of thousands of dollars or more.

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