Can Bankruptcy Remove my Second Mortgage?

Can Bankruptcy Remove my Second Mortgage?

A Chapter 13 bankruptcy can help rid yourself of your mortgage debt.

Short Answer: YES — but only in a Chapter 13.

If you own real estate with a second or other subsequent mortgage, chances are you can remove that lien in a Chapter 13 bankruptcy case. In many instances, at least locally in San Diego County, we are seeing real estate values decline dramatically. With real estate declining as much as it has, most second and other mortgages beyond the first are wholly unsecured.

If you own real estate with a second or other subsequent mortgage chances are you can remove that lien in a Chapter 13 Bankruptcy Case. This is most common these days as a result of the declining real estate market. In many instances, at least locally in San Diego County, we are seeing real estate values decline dramatically. With real estate declining as much as it has, most second and other mortgages beyond the first are wholly unsecured.

If you own real estate with a second or other subsequent mortgage chances are you can remove that lien in a Chapter 13 Bankruptcy Case. This is most common these days as a result of the declining real estate market. In many instances, at least locally in San Diego County, we are seeing real estate values decline dramatically. With real estate declining as much as it has, most second and other mortgages beyond the first are wholly unsecured.

In fact, in many cases, even the amount owed on the first deed of trust/mortgage on the property is greater than the value of the house. So how can you avoid a second lien on real estate? It’s through a code provision in Chapter 13, 11 USC 1322.

For example: Suppose a debtor purchased a home at the top of the market for $700,000.00. They purchased the house with a $500,000 first deed of trust and a $200,000 second deed of trust . Suppose now the house has depreciated and is now worth $490,000. Since the second deed of trust of $200,000 is not secured by the real estate anymore, it is considered “wholly under secured.”

In chapter 13, you can “avoid” a “wholly under secured” lien on your personal residence. Thus, if one were to “avoid” the lien, then they would now have a house valued at $490,000 with only a first deed of trust for $500,000. The $200,000 second was “stripped” from the property and is treated as an unsecured creditor in the chapter 13 case no different than a credit card and would be paid back at the same percentage one is paying back unsecured creditors as set out in one’s Chapter 13 Plan.

The one “catch” is that while you file your motion to strip the lien shortly after you file the case and the court grants the motion, the lien is not officially taken off your property until you complete the plan by making all the payments over the 3-5 year period.  If you do not complete the plan payments then the order stripping the lien is void and the lien will remain on your property. You no longer owe the $200,000 on the house.

While lien stripping is most common on under secured mortgages, there are also several other ways to avoid second mortgages in Bankruptcy. Other examples of lien stripping can take place if :

  1. There is a balloon payment due during the life of the chapter 13 case;
  2. The second is secured by other assets in addition to the house (personal property, etc.); and,
  3. The property is not the “debtor’s principal residence.”

So while many people are starting to surrender their real estate back to the bank, think twice before you make your decision and speak with a competent bankruptcy attorney. You just might be able to remove the second mortgage and keep the house with a more affordable mortgage payment!

Not only might this make the payments more manageable, which just might allow you to stay in the house, it will also make it much easier to eventually sell.

For any further questions, please feel free to call the Law Office of Mark A. Reed: 858-277-0232

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