How can I strip a second mortgage in a bankruptcy filing?

When filing a Chapter 7 or Chapter 13, second mortgage debt can be a point of contention between you and your lender. In all forms of bankruptcy, most first mortgages are considered secured debt--so are most second mortgages, if the value of the property is high enough to cover both mortgages. In some situations, you could strip the second mortgage because of a discrepancy in the value. This takes a qualified attorney and it may not apply in all states.

Loan Stripping

Many people find themselves in second mortgages that are upside down. This means that the value of the home is no longer high enough to cover the value of both mortgages. For example, you may have secured a second mortgage five years ago on your home worth $150,000. The first mortgage may be for $100,000 while the second is worth $30,000. However, if the home is no longer worth that amount, but is worth only $120,000, the second mortgage can no longer be considered a secured loan.

In some cases, you may ask the bankruptcy court to strip this loan from your home’s security. Keep the following in mind:

• You may still have to repay it if the debt is considered a priority debt in Chapter 13 bankruptcy.
• In Chapter 7 bankruptcy, it will become unsecured debt, which is usually fully discharged through the process.

Hiring an Attorney

In each of these situations, hire a bankruptcy attorney to handle your case. This is particular important in these more complex processes, such as lien stripping.