Los Angeles Second Mortgage Lawyers
For many people, their home represents their largest asset. Many people borrow against the equity in their home by taking out a second and sometimes even a third mortgage. They use this money to pay for educational expenses or to fund a small business. Others simply use the money for vacations or even to cover daily expenses.
Bankruptcy has a little-known provision that allows debtors to strip junior liens from their home. Contact Wadhwani & Shanfeld today to discuss this possibility with a Los Angeles second mortgage lawyer.
A Closer Look at Lien Stripping and Chapter 13
Our clients in Los Angeles can use lien stripping as part of a Chapter 13 bankruptcy. The process works like this. If the value of your home is less than your primary (senior) mortgage, you can eliminate junior liens, like a second or even a third mortgage. This is called being “underwater,” where the debt exceeds the equity in your home. Once a lien is stripped, it’s essentially an unsecured debt, like medical debt.
Here is an example. Sharon has a home worth $400,000. Her primary mortgage is for $450,000. She also has a second mortgage for $30,000. In a Chapter 13 bankruptcy, Sharon can strip the second mortgage and convert it to unsecured debt.
Why does this matter? Essentially, by converting a secured lien to an unsecured debt, Sharon can finally discharge it when she completes her Chapter 13 repayment plan.
The reason Sharon can strip junior liens is that there’s no equity left over, as the senior mortgage is larger than the equity in the home. Junior lienholders would get nothing. The bankruptcy code then lets you treat the lien as unsecured debt.
Of course, stripping the lien does not make it immediately disappear. Instead, it is treated as a “nonpriority unsecured debt” in bankruptcy. You will possibly need to make payments on the junior lien and on other nonpriority debt (like credit cards) for the duration of the plan, which could be three to five years. Most people pay very little, however. If you stick to the repayment plan, any remaining debt would be eliminated at the end. Unfortunately, if you exit the bankruptcy before completion, a junior lien remains on the property.
Unfortunately, our clients cannot use lien stripping in a Chapter 7 bankruptcy. This is only an option in a Chapter 13. And it typically is an option when the value of your home collapses to the point that your home is underwater.
Are You Underwater on Your Home?
Lien stripping is a powerful tool we can use on behalf of our clients. When you exit bankruptcy, your home will be less encumbered, and property values might recover in the coming years that eventually your equity is larger than your home loan.
Please call Wadhwani & Shanfeld to check if lien stripping is something you are interested in to get rid of a second mortgage. Our Los Angeles 2nd mortgage lawyer can answer any questions that you have.