Monday, September 5, 2011
Stripping Off Home Mortgages: An Introduction
One very powerful feature of Chapter 13 bankruptcy is a homeowner’s ability to get rid of second or third mortgages in certain circumstances. This is called “lien stripping.” Here’s how it works.
If you have a junior mortgage (basically, anything other than your first mortgage) that no longer has any security by the value of your home, you can strip it off in Chapter 13 bankruptcy.
For example, say your home is worth $200,000, the balance on your first mortgage is $225,000, and you have a second mortgage in the amount of $25,000. Since your home equity is not enough to cover even your first mortgage, your second mortgage is no longer secured by equity in your home. In Chapter 13 bankruptcy, you can strip off the second mortgage.
What Types of Mortgages Can Be Stripped Off?
You can strip off any junior mortgage, such as a second or third mortgage, or a home equity line of credit (HELOC). The junior mortgage must be wholly unsecured. This means that if even a small portion is secured by the equity in your home, you cannot strip it off.
What Happens to the Stripped Off Mortgage?
The junior mortgage becomes part of your unsecured debt. It is treated like the rest of your nonpriority, unsecured debt in Chapter 13 bankruptcy – that is, you pay it off in part through your Chapter 13 plan. Most Chapter 13 filers pay only a small portion of their unsecured debt. At the end of the plan period, the remaining unsecured debt is discharged. You must complete your Chapter 13 plan to have your mortgage discharged.