REMOVE A SECOND MORTGAGE or OTHER JUNIOR LIEN FROM YOUR PRIMARY RESIDENCE
LIEN STRIPPING IN CHAPTER 13 ENABLES DEBTORS TO REMOVE BURDENSOME MORTGAGES FROM THEIR HOMES
One of the most significant benefits available to individuals under present bankruptcy laws is the ability to remove a second mortgage or other junior lien from an individual’s primary residence in cases where there is insufficient equity in the home to secure the second mortgage or other junior lien. Therefore, if you have two mortgages against your home, you can remove the second mortgage if your home is worth less than you owe on the first mortgage. If your home is worth less than you owe on the first mortgage, in reality, there is insufficient value in your home to secure the junior lien holder.
For example, a couple’s home is worth $125,000.00. The principal balance of the first mortgage against their home is $130,000.00, and they owe $25,000.00 on a second mortgage. This couple could seek to have the second mortgage removed from their home in adversary proceedings in a Chapter 13 bankruptcy case.
Another example is where an individual’s home is worth $125,000.00, they have a first mortgage of $90,000.00, a second mortgage of $40,000, and a third mortgage in the amount of $12,000.00. Since there is insufficient equity in the home to even partially secure the third mortgage, it could be eliminated in adversary proceedings in a Chapter 13 bankruptcy case.
To eliminate a lien against your primary residence in Chapter 13 bankruptcy proceedings, it is necessary for your bankruptcy attorney to initiate legal proceedings (adversary proceedings) within your bankruptcy case against the junior lien holder. The only issue in the litigation against the junior lien holder would be the value of your home. Evidence of your home’s value may consist of appraisals, tax notices, your observations of home sales in your neighborhood and other similar factors. In evaluating whether or not you are eligible to seek removal of a second mortgage (or other junior lien), the property value you should consider is what you actually believe you could sell your home for if you put it on the market. Appraisals obtained for purposes of refinancing are often high.
If individuals are successful in removing second mortgages and other junior liens from their homes, the debt to the junior lienholder will be treated as a general unsecured claim under the individual’s Chapter 13 Plan. This means that if the Debtor is paying 15 cents on the dollar to their unsecured creditors under the terms of a Chapter 13 Plan, they would also be required to pay 15 cents on the dollar on the debt previously secured by a lien on their home. No interest would be paid on this unsecured debt.
Further, from a practical standpoint, for many individuals it is preferable to surrender their homes and than continue to pay a fully unsecured second or third mortgage. If they can remove the second or third mortgages from their home, payment of the first mortgage is generally consistent with what the home is worth.