By Richard Feinsilver
If you are one of the many homeowners who purchased your primary residence with 80/20 mortgages, or if you took out a second mortgage in the past few years, did you know that you may be able to remove the second mortgage lien from your home in a Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy offers an important, and often unknown and over-looked, option to consumers who have second and/or, perhaps third, residential real estate mortgage liens on their primary residences - namely, that of removing those junior liens from your home.
If the current fair market value of your home (as determined by an appraisal prepared by a licensed real estate appraiser) is below the present outstanding balance on your first mortgage (including arrears, if applicable), the second mortgage lien can be "stripped", and the debt associated with it can be reclassified as a unsecured debt (such as credit card debt, etc). This is also referred to as a "Cramdown" or "Lien Stripping."
The stripping/cramdown provisions in the Bankruptcy Code affecting second mortgage liens have been available to homeowners in Chapter 13 bankruptcy since 1994. This should not be confused with the bill proposed in early 2009 in Congress which sought to allow Bankruptcy Judges to modify mortgage liens (which was not passed).
That bill sought to expand the provisions that have been applicable to second mortgages to first mortgages. Even if you have already modified your first mortgage directly with your lender, or are in a trial modification on your first mortgage, this relief may be available to you.
While foreclosure remains the primary reason to file a Chapter 13 bankruptcy petition, individuals who may not be homeowners, or homeowners who are current on their mortgage obligations, but have incomes above the median income for their state and may not be eligible to file a petition for Chapter 7 bankruptcy can file a petition for Chapter 13 bankruptcy to effectively deal with their debts.
Chapter 13 bankruptcy is designed for working people with steady incomes who want to pay their debts but are currently overwhelmed with bills, judgments, lawsuits, and other financial issues. Even if you do not own a home, the filing of a Chapter 13 bankruptcy petition can assist you to regain control of your financial situation.
A Chapter 13 bankruptcy repayment plan allows an individual to repay mortgage arrears and some, or all, other their other debts (such as credit cards, medical bills, etc.), over a three to five year period. While a Chapter 13 plan is in effect, creditors cannot either start or continue their collection efforts, and they must accept what the plan pays them.
Any individual, or married couple, even if self-employed, can receive Chapter 13 bankruptcy relief if they owe less than $1,010,000.00 in secured debt (i.e. mortgages, car loans, equity loans), and less than $310,000.00 in unsecured debt.
In most Chapter 13 Bankruptcy cases, only a small portion of this type of debt is paid over a 3 to 5 year period. Immediately upon the successful completion of your Chapter 13 payment plan, the second (junior) mortgage lien shall be permanently removed from your property by Order of the Bankruptcy Court. Please be aware, though, that in order to qualify for this benefit, you must meet the usual and customary qualifications for Chapter 13 bankruptcy.
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