Saving Your Home: The Amazing Chapter 13 Second Mortgage Lien Strip

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If you have a second (or third) mortgage and your home is worth no more than the balance on your first mortgage, that second (or third) mortgage may be able to be stripped off your home title. This can save you a tremendous amount of money both monthly and over time, and should make saving your home much more feasible.

#1: This procedure ONLY APPLIES to CHAPTER 13 bankruptcies, the “adjustment of debts” payment plan. It can’t be done in a “straight” Chapter 7 case.

#2: It does NOT apply to your first mortgage — even if your home is worth less than your first (and perhaps only) mortgage, you can’t reduce the balance on that mortgage to the value of your home.

#3: Lien stripping only works with mortgages, trust deeds or equity lines of credit that you signed onto voluntarily. There are many other kinds of possible liens that could attach to your title — income tax liens, judgment liens, child and spousal support liens, contractors’ liens, utility liens, homeowner association liens — none of which can be stripped off the title. (On the other hand, Chapter 13 can provide good ways to deal with some of these other liens.)

#4: Your home cannot be worth a penny more than the balance on your first mortgage. The point is that there cannot be ANY EQUITY in the home beyond the first “senior” mortgage.

#5: This lien stripping does not happen automatically in a Chapter 13 case, but is a procedure your attorney has to affirmatively take care of. The affected mortgage lender will have an opportunity to object, such as by arguing that the home’s value is greater than the balance on the first mortgage and, thus, that you’re not able to strip the second mortgage.

#6: You may have to pay a portion of the stripped second mortgage during your three-to-five-year Chapter 13 case. The mortgage is treated as an unsecured creditor and so shares pro rata in whatever funds you are required to pay to your pool of unsecured creditors. But in most situations this does not increase the amount you need to pay; the same amount just gets distributed differently among your creditors. At the end of your case, you will owe nothing on your stripped mortgage and it will be removed from your title.

#7: Because you do not get a discharge of your debts in a Chapter 13 case until completing it successfully, your lien strip will not work unless you finish your case.

If you have a second or third mortgage on a home worth no more than the balance on your first mortgage, even if you are only casually considering bankruptcy, you should get competent advice about this lien stripping option. Bailey & Galyen is here to provide you that advice. Call 1-800-518-3328 or contacting us here. Thank you.