Filing for bankruptcy can be a confusing and stressful time as you try to understand specific bankruptcy laws and make sense of an often complicated financial situation. Many questions clients ask when considering bankruptcy have to do with which loans and debts can be eliminated and which must be restructured instead. When you have a second or third mortgage, even if it involves a lien, you can eliminate that debt as part of your bankruptcy under certain circumstances.
The process is called lien stripping, and whether or not you will be able to take advantage of this option depends on factors such as how much your house is worth and how much you owe on your first mortgage.
The First Mortgage
Nolo.com explains the mortgage filed first takes precedence over any subsequent mortgages. If you took out two mortgages at the same time, which is fairly common when buying your first home, the one filed first will still be considered the primary mortgage. It is also typically the largest mortgage with the most debt.
The Value of Your Home
Recent decline in the price of homes has caused many people to owe more money to a mortgage company than their homes are actually worth. This is called being upside down on your home, and it is a reason some people abandon their homes and their mortgages all together.
When you filing a chapter 13 bankruptcy, you will still be responsible for your first mortgage payments and will be able to remain in your home. While other types of bankruptcies, like chapter 7 for example, involve liquidating your assets to pay off creditors, a chapter 13 bankruptcy focuses on creating a plan to repay your debts over a specific period of time.
The process of lien stripping comes into play when you are current on your mortgage payments, but your total first mortgage debt is more than the value of your home. For example, you may have paid $300,000 for your home five years ago, but today it is assessed at only $220,000. You are upside down on your loan if your mortgage balance is still more than $220,000.
When you file for bankruptcy, an independent assessor will determine the market value of your home.
Second and Third Mortgages or Home Equity Loans
Many people borrow money against the value of their homes. This may involve taking out an additional mortgage or a home equity loan to be used for home improvements or other expenses. Unfortunately in the case of home improvements, that construction typically costs you much more money than the value it adds to your home.
If you took out a second mortgage or a home equity loan and then faced financial trouble like the loss of income from a job, a serious medical problem or other crisis, you may have become unable to make the payments on that loan. If you defaulted on the loan, you may actually be facing a lien on your house. In this case, you would actually lose money if you sell your home.
When you are in a situation where a bank has placed a lien on your home for money owed on an additional mortgage, you can ask the court to strip that loan. This means you will no longer be responsible for paying off that loan, and your debtor will not have the right to collect the money if your home is sold.
Lien stripping can be a way of saving your home from foreclosure and allowing you to keep your home even as you are dealing with a bankruptcy. Your bankruptcy attorney, like Travis A. Gagnier, will help you understand whether you qualify for lien stripping and how to ask the bankruptcy court to allow you to take advantage of this procedure.