After the housing debacle of the past few years, home values plummeted. Clients are often concerned that they owe significantly more than their home is now worth. While bankruptcy cannot force a loan modification or refinance, there is a tool available to help. It is commonly referred to as lien stripping. Here’s how it works:
Many homeowners have second mortgages for a variety of reasons. Some take out home equity loans to fund major home projects. Some have a second mortgage as a financing tool to avoid a down payment. Others may have a judgment lien. (This is when a creditor files a lawsuit, gets a judgment and then the judgment becomes a lien against your real estate.) Lien stripping through Chapter 13 bankruptcy effectively tells the holder of the second mortgage that it is no longer attached to the property.B It becomes an unsecured debt, sort of like a credit card debt.
Let’s say you have two mortgages. The first mortgage has a balance of $150,000.B The second mortgage has a balance of $25,000. Let’s assume that the value of your house in today’s market is now only $135,000. Since the value of the house is less than the balance of the first mortgage, there is no equity in the house securing or holding the second mortgage. For individuals who file Chapter 13 bankruptcy and find their homes in a similar predicament, we file an Adversary Proceeding, which is a separate lawsuit within the Bankruptcy Court. This separate suit asks the judge to declare the second mortgage unsecured. If the suit is successful (and it is highly dependent on being able to prove the new value), Debtors can exit a completed Chapter 13 without the second mortgage attached to their home. Depending on the payout of the Chapter 13, that entire mortgage could be discharged.
There are many nuances to the Bankruptcy Code. No two cases are alike. It is critical that you work with a Kansas City bankruptcy attorney well versed and experienced in the various Chapters so they can explain the different advantages for your particular situation.