The opportunity to get a second chance is what bankruptcy is all about. People who are pursuing Chapter 13 bankruptcy understand this, but what they often do not realize is that Chapter 13 could actually help you eliminate a second mortgage.
Nolo.com offers the following concise explanation of how this works:
“Chapter 13 may help you eliminate the payments on your second or third mortgage. That’s because if your first mortgage is secured by the entire value of your home, which is possible if the home has dropped in value, you may no longer have any equity with which to secure the later mortgages. That allows the Chapter 13 court to “strip off” the second and third mortgages and recategorize them as unsecured debt — which, under Chapter 13, takes last priority and often does not have to be paid back at all.”
As long as you owe more on your first mortgage than your house is worth, an individual or family has the right to eliminate all other mortgage liens on their property in Chapter 13 Bankruptcy. To successfully avoid the wholly unsecured second mortgage or home equity line and get a second chance through chapter 13 bankruptcy, the following process must take place:
- Your attorney will file an adversary to find out whether the lien can be avoided. This is not part of the Chapter 13 filing itself: it is filed with the Bankruptcy Court.
- Since a mortgage company usually responds that the house is worth more than the first mortgage and the lien is not wholly unsecured, you must get a full appraisal that shows a drop in value of the house. An appraisal provides evidence of a drop in value, demonstrating that the lien should be stripped.
- The second mortgage is treated as nonpriority unsecured debt when you file your bankruptcy. You won’t have to make any payments on this debt outside of your bankruptcy, just like credit card or medical debt. Instead, you will pay a portion of this unsecured debt through your Chapter 13 plan. If you complete the plan, anything left on the mortgage is eliminated through discharge.
- However, it is important to remember that if your case is dismissed before you complete your bankruptcy plan, your second mortgage lien will not be stripped and the second mortgage lien will not be removed from your house until you complete your plan and get a discharge.
You don’t need to be burdened by a second mortgage to have good reason to file for Chapter 13 Bankruptcy. The following shows some of the traits of this form of Bankruptcy:
- Foreclosures and repossessions are stopped: If your have recently suffered the loss of job or gone through a divorce or illness, you may have fallen behind on financial obligations such as mortgage or car payments. Chapter 13 Bankruptcy may enable you to keep your property while offering a much more manageable payment plan.
- Asset levels are too high for Chapter 7: Even if you have too much equity in your house to qualify for Chapter 7, or you have assets that disqualify you from protected or exempt status, you may be able to keep your assets and pay your debts back through consolidation.
- Income is Too High: Likewise, people may also file for Chapter 13 Bankruptcy if they have too much income to get a second chance through Chapter 7 Bankruptcy filing.
- Previous Chapter 7 Filing: Chapter 13 Bankruptcy will be your only option if you have filed a Chapter 7 Bankruptcy within the last eight years. Bankruptcy code holds that you are not eligible to file again.
To see if you would be able to get a second chance and eliminate your second mortgage, please feel free to call one of the attorneys at Suburban Legal Group PC to discuss your case further. Request a Free Chapter 13 Consultation Today.