How Are Second Mortgages Handled During a Chapter 13 Bankruptcy?

 Posted on July 09, 2021 in Bankruptcy

There are many types of situations where a homeowner may find themselves struggling to make their ongoing mortgage payments, and in these cases, they may be concerned that they may lose their home through foreclosure. Financial difficulties may arise because of medical debts or other unexpected costs, or the loss of a job may affect a person’s ability to pay debts and other expenses. Homeowners in these situations may consider bankruptcy as a way to eliminate their debts and regain financial stability, but they will want to be sure to understand whether they will be able to avoid the loss of their home. Chapter 13 bankruptcy is often the best option in these cases, and one benefit that it may provide is the ability to eliminate a second or third mortgage on a home.

Lien Stripping in Chapter 13 Bankruptcy

The way debts are handled during a Chapter 13 bankruptcy will depend on whether they are secured or unsecured. Secured debts involve collateral that can be repossessed if a debtor defaults on their debts and these include most mortgages. However, if a homeowner owes more on their mortgage than their home is worth, any subsequent mortgages or a home equity line of credit may be considered unsecured debts.

In a Chapter 13 bankruptcy, a payment plan will be created in which the debtor will pay off as much of their unsecured debts as possible over a period of three to five years. The amount of the payments that the debtor will make during the plan will be based on their disposable income, meaning the amount that is left over after they pay their regular living expenses, as well as payments on a mortgage or any other debts that are not included in the repayment plan. Homeowners will be able to avoid the foreclosure of their home if they continue to make their mortgage payments, while also making all of the required payments in the Chapter 13 repayment plan. 

By classifying second or third mortgages as unsecured debts, these mortgages can be included in a Chapter 13 payment plan. This is known as “lien stripping,” since it will allow those debts to be removed from the home. Once the payment plan is completed, these debts will be discharged, and the debtor will no longer be required to pay them. 

Contact Our Broward County Chapter 13 Bankruptcy Lawyer

If you have found yourself struggling to pay the debts you owe, and you are worried that you could lose your home due to foreclosure, you will want to understand your best options for obtaining debt relief through bankruptcy or other methods. At Elliot Legal Group, we can review your finances and advise you of whether bankruptcy is right for you, and we will provide you with legal representation to make sure you can complete this process successfully. Contact our Hollywood, FL bankruptcy attorney today at 754-332-2101.

Sources:

https://homeguides.sfgate.com/can-keep-home-release-second-mortgage-debt-through-bankruptcy-47148.html

https://www.law.cornell.edu/uscode/text/11/506

https://www.mvt.com/Content/Public/Files/3.%20%20Lien%20Stripping%20in%20Bankruptcy%20Chapter%2013%20and%20Chapter%207.pdf