If you have multiple mortgages and owe more on the first mortgage than your home is currently worth, you may be able to use Chapter 13 bankruptcy to get out from under second or third mortgages with a process known as lien stripping. A qualified Morris County bankruptcy attorney can assist you with the lien stripping process and all aspects of filing bankruptcy.
What Is Lien Stripping?
When a junior mortgage is “wholly unsecured,” that is, there is no equity available to secure the second mortgage because the first mortgage balance is more than the total value of the property, then you may be able to strip the second lien in a Chapter 13 bankruptcy. By stripping the lien, you essentially eliminate the mortgage creditor’s security interest and get to treat the junior mortgage as a dischargeable unsecured debt.
For example, if your home is worth $200,000 and you have two mortgages, the first with a balance of $265,000 and the second with a balance of $28,000, then your second mortgage is considered “wholly unsecured,” because you owe more on your first mortgage than the home is worth. In this scenario, you may be eligible to strip the second lien in a Chapter 13 bankruptcy. If your home is worth $200,000 and you owe only $180,000 on the first mortgage, however, then you cannot lien strip your $28,000 second mortgage. In this scenario, there is $20,000 equity leftover after the first mortgage, meaning the second mortgage is not “wholly unsecured” – that $20,000 value secures part of the second mortgage.
An experienced Morris County bankruptcy lawyer can review your mortgage situation to determine if you may be eligible for lien stripping.
Benefits of Lien Stripping
Lien stripping enables you to exit a successfully completed Chapter 13 plan with fewer mortgages. In Chapter 13 bankruptcy, some debtors are allowed to pay back a fraction of their total unsecured debt and to discharge the rest. If you are one of those debtors, then lien stripping can help you keep your home without having to pay back the entire junior mortgage debt–a stripped junior mortgage is treated as an unsecured debt, so you would pay back a portion of it through your Chapter 13 plan, and then the remaining balance would be discharged. Even if you are required to pay back all unsecured debt through your Chapter 13 plan, lien stripping still allows you to throw a junior mortgage in with other unsecured debts, so you can emerge from bankruptcy with the junior mortgage completely paid off. Simply put, if you strip the liens of all junior mortgages, successfully complete your Chapter 13 plan, and receive a Chapter 13 discharge, you will emerge from bankruptcy with only one mortgage debt remaining.
To determine if you are eligible for lien stripping and how it may benefit you, contact a knowledgeable Morris County bankruptcy attorney today.