Chapter 13 bankruptcy offers individuals a structured way to reorganize their debt and maintain important assets, like a home. One important benefit of this process is lien stripping. When filing for Chapter 13 bankruptcy, it is crucial that you understand your rights and options, including whether you can strip your second mortgage. To learn how this works and secure skilled legal counsel, reach out to an experienced Bergen County Chapter 13 bankruptcy lawyer and schedule your free consultation today.
What Does Stripping a Mortgage Mean?
To “strip” a second mortgage means to convert it from a secured debt to an unsecured debt. A secured debt is one that is backed by a collateral asset that a lender can seize if the borrower defaults. For example, a home is a secured debt. If you fail to repay your mortgage, the lender has a legal right to take ownership of the home to recover their losses.
An unsecured debt is one that has no collateral associated with it. The loan is based on the borrower’s history and creditworthiness. The borrower does not pledge any specific asset as security for the debt if it is not repaid. For example, credit card balances, personal loans, and student loans are unsecured debt. If the borrower fails to repay, the lender cannot seize any specific property to recover their losses.
This reclassification is beneficial for the borrower because of the way Chapter 13 bankruptcy works. After filing a petition for bankruptcy, you will create a repayment plan outlining how you will repay your debts over 3 to 5 years before they are discharged. The borrower will likely end up paying a minimal amount over the pay period, and in the end, the lien will be removed from the property. This allows individuals to maintain their home while eliminating tens of thousands of dollars in debt.
Can I Strip a Second Mortgage in Chapter 13 Bankruptcy?
A mortgage is a secured debt, but it is possible that a second mortgage could be stripped and reclassified if certain conditions apply. You can only strip your second mortgage if the amount you owe on your first mortgage exceeds the value of your home.
For example, suppose that your house is worth $300,000. You have a first mortgage of $350,000 and a second mortgage of $50,000. Because your house is worth less than the balance of your first mortgage, you can strip the second and convert it to an unsecured debt. However, if your house is worth $375,000, you would not be able to strip the second mortgage as the home is valued higher than your first mortgage.
Bankruptcy law can be complex, so it is imperative that you secure skilled legal advice during your case. Reach out to an attorney at Boyd & Squitieri today for more information and representation.