Can You Eliminate a Second Mortgage Through Bankruptcy? The Power of Lien Stripping in Chapter 13
If you’re struggling financially and burdened by a second mortgage, you might wonder if bankruptcy can provide relief. The good news is that Chapter 13 bankruptcy offers a powerful tool known as “lien stripping,” which can potentially eliminate your second mortgage if your home’s value is less than the amount you owe on your first mortgage, often referred to as being “underwater.”
Let’s explore how lien stripping works under California law and how it can significantly improve your financial situation by reducing your secured debt.
Understanding Lien Stripping
Lien stripping refers to the process of converting secured debts (such as second or subsequent mortgages) into unsecured debts, essentially “stripping” away the lien from your property. This strategy can be particularly effective when your home has lost value, leaving you owing more on your mortgages than the home’s current market worth.
Under federal bankruptcy law, lien stripping is permissible in Chapter 13 bankruptcy when the value of your property no longer supports the lien of a second or junior mortgage. For instance, if your home is worth $400,000, but your first mortgage balance is $420,000, your second mortgage would be considered completely unsecured. Consequently, you could potentially remove or “strip” this second mortgage lien through Chapter 13 bankruptcy.
How Does Lien Stripping Work in Chapter 13 Bankruptcy?
Chapter 13 bankruptcy, often referred to as a “reorganization bankruptcy,” involves a structured repayment plan that typically lasts between three to five years. During this plan, you repay a portion of your debts based on your disposable income, after which eligible remaining unsecured debts are discharged.
When you file Chapter 13 bankruptcy in California, your bankruptcy attorney will file a motion with the court seeking to strip the lien on your second mortgage. Your property’s current appraised value and the balances of your existing mortgages will need to be accurately documented to show that your second mortgage is fully unsecured.
Once the bankruptcy court approves lien stripping, your second mortgage becomes an unsecured debt. You will then pay only a portion of this unsecured debt through your repayment plan, typically pennies on the dollar, with the remainder discharged at the end of the plan.
California’s Housing Market and Lien Stripping
Lien stripping can be particularly beneficial in volatile housing markets like California, where property values can fluctuate significantly. After the housing crises of past decades, many California homeowners found themselves owing significantly more on their homes than their properties were worth. For such homeowners, lien stripping offered a lifeline.
While California does not impose additional state-specific restrictions on lien stripping, it’s essential to comply fully with federal bankruptcy law and court procedures. Consulting with experienced Los Angeles Chapter 13 bankruptcy lawyers is critical to navigating the lien stripping process effectively and securing court approval.
The Benefits of Lien Stripping
The advantages of lien stripping can be profound for homeowners:
- Immediate financial relief: Removing a second mortgage can significantly reduce monthly expenses, providing immediate financial breathing room.
- Long-term savings: You’ll no longer be obligated to repay the stripped lien after completing your Chapter 13 plan, saving potentially tens of thousands of dollars over time.
- Enhanced equity building: By removing the second mortgage lien, you regain the ability to build equity more quickly once your home’s value recovers.
Limitations and Considerations
Despite its powerful benefits, lien stripping comes with specific requirements and limitations. You can only strip a lien if your second mortgage is fully unsecured, meaning your home’s value must be less than or equal to your first mortgage balance. If even a small portion of your second mortgage is secured by your home equity, lien stripping is not an option.
Additionally, lien stripping is only available under Chapter 13 bankruptcy, not Chapter 7. Chapter 7 bankruptcy primarily discharges unsecured debts and does not offer the option to remove secured liens unless the property securing the lien is surrendered.
The Importance of Expert Legal Assistance
Lien stripping is a sophisticated legal strategy requiring precise documentation, accurate home appraisals, and meticulous adherence to bankruptcy court rules. Mistakes in the lien stripping process can jeopardize your bankruptcy case and leave your second mortgage intact.
Working with skilled Los Angeles Chapter 13 bankruptcy lawyers ensures the process is handled correctly from start to finish, protecting your interests and maximizing your financial relief.
Contact Wadhwani & Shanfeld
If you’re overwhelmed by mortgage debt and considering bankruptcy, Wadhwani & Shanfeld can help you explore lien stripping and other beneficial strategies under Chapter 13 bankruptcy. Our experienced attorneys offer comprehensive and compassionate guidance tailored to your unique financial situation.
Reach out to Wadhwani & Shanfeld today for expert legal advice and support to regain control over your financial future.
Sources:
cornell.edu/uscode/text/11/506
gov/court-programs/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics
