How does a Chapter 13 bankruptcy affect a second mortgage?

Chapter 13 is known as the reorganization bankruptcy. Because a debtor repays certain creditors in full and a portion of the amount owed to other creditors, a debtor may be able to get rid of a second mortgage if lien exceeds the value of the property.

The effect of a Chapter 13 bankruptcy on a second mortgage depends on several factors. A Chapter 13 second mortgage may remain secured by the real property or it may be eligible for elimination. It is possible to eliminate a second mortgage entirely if the value of the debtor’s home is equal to or less than the amount the debtor owes on their first mortgage. This is often the case when home values have dropped.

If there is not enough equity in the home to secure more than the first mortgage, the bankruptcy court may “strip off” the second mortgage. This means that the second mortgage becomes unsecured debt. In Chapter 13, unsecured debt is given last priority. In Chapter 13, a debtor must repay creditors in a repayment plan. Because unsecured debt is given last priority, the amount unsecured creditors receive ranges from zero to 100 percent. It is not uncommon for unsecured creditors to receive nothing.

A debtor cannot strip a second mortgage in Chapter 7.

If you are planning on filing for bankruptcy and want to learn more about lien stripping in Chapter 13, contact an experienced bankruptcy attorney for assistance.