A Chapter 13 bankruptcy gives homeowners another option in their fight to stay in their homes and avoid foreclosure. This new option, known as lien stripping, results from the decline of real estate prices across the country. It presents an opportunity for homeowners which can cut monthly mortgage obligations and help to bring payments back in line with their current financial situation.
This opportunity, which is complex and best navigated by an experienced bankruptcy attorney, is targeted at second mortgages and/or home equity lines of credit. In situations where declining property prices have dropped the appraised value of your primary residence below the balance owed on the first mortgage, any subordinated loans behind the first mortgage are considered as “wholly unsecured.” This puts all subordinated mortgages and home equity lines of credit on par with credit card and other consumer debt.
Categorized as unsecured debt, your second mortgage and your home equity line of credit can be fully discharged in a Chapter 13 bankruptcy filing. Here’s an example of how it would work:
If the value of your primary residence has decreased, you could benefit by having your second mortgage and/or home equity line of credit dismissed in a Chapter 13 bankruptcy. A bankruptcy attorney can help to determine if your subordinated loans would be considered as wholly unsecured by the bankruptcy court. They can also determine whether you can benefit from the discharge of these obligations via lien stripping through a Chapter 13 bankruptcy.