Can I Keep My Home & Release Second Mortgage Debt Through Bankruptcy?
- In a Chapter 13 proceeding, debtors must successfully repay their debts according to the terms of their repayment plan to receive a discharge. Priority debts, such as child support or back taxes, must be repaid first and in full. Secured debts, such as mortgage loans, must also be paid in full if you wish to maintain ownership of the home. Unsecured debts, such as credit cards, receive the lowest repayment priority. The percentage of unsecured debt you must repay is based on your income and the valuation of your assets. To strip a second mortgage lien, you must be able to convert it to an unsecured debt.
- Your ability to strip additional mortgage liens is based on your home's value and the outstanding balance due on your primary mortgage. If the balance of your primary mortgage exceeds your home's fair market value, then any additional mortgage or home equity loans are no longer considered to be secured by the property. In this instance, you can seek to have the second lien removed. You cannot, however, seek removal of a second lien if the loan is deemed to be undersecured. For example, if your primary mortgage balance is $100,000 and your second mortgage balance is $50,000 but your home is valued at $110,000, the second lien is considered to be partially secured. In this instance, you may be able to modify the second loan but not remove it entirely.
- To have a second lien stripped, you must first obtain a professional appraisal of your primary home's value. Once you've established that your second mortgage is wholly unsecured, you must initiate an adversary proceeding by filing a motion with the bankruptcy court to strip the second lien, after you file your Chapter 13 petition. The court will schedule a hearing to determine whether your home's value qualifies you for lien stripping. If the court approves your motion, the second loan will then be converted to an unsecured debt.
- You must complete the terms of your repayment plan to receive a discharge in a Chapter 13 bankruptcy case. If your case is dismissed because you fail to make regular payments or if you convert to a Chapter 7 filing, the stripping of your second lien will be reversed. If you filed Chapter 13 to avoid foreclosure, your lender may resume foreclosure proceedings if your case is dismissed due to nonpayment. You may be able to receive a hardship discharge if you can prove your inability to make payments is due to an unforeseeable change in your financial situation.