Second mortgages, home equity loans and bankruptcy

Second mortgages, home equity loans and bankruptcy

It is not uncommon to have a first mortgage and a second mortgage or a home equity loan on your home. Even though the amount of the second mortgage or home equity loan is less than your first mortgage, the interest rate that you are paying is usually much higher. You may be wondering if there is anything that can be done to reduce these encumbranceson your pro- perty. It may mean the difference between being able to keep your home or losing it becauseyou cannot afford the payments, or worse, your house is being foreclosed on.

The answer is that there are certain situations in which that second mortgage or home equity loan can be modified, or as it is known in bankruptcy language, "stripped off." The first requirement is that a Chapter 13 bankruptcy be filed. (Chapter 7 bankruptcies do not allow for modifIcation of a second mortgage or home equity loan). How this is done is best illustrated by the following examples:

1) You own a house that has a value of $300,000.00 at the time you file bankruptcy. The first mortgage is $325,000.00. The second mortgage or home equity loan is $75,000.00. That $75,000.00 can be "stripped off" and be treated the same as your other unsecured debt. If your Chapter 13 Plan calls for paying 10% to unsecured creditors, you will be paying $7,500.00 over the life of your Chapter 13 bankruptcy, which is between 3 and 5 years. If your payment plan is 20%, then you will pay $15,000.00 over that period of 3 to 5 years.

2) In this example, let's also assume that your home is worth $300,000.00 at the time you file bankruptcy. The first mortgage is $275,000.00. The second mortgage or home equity loan is $75,000.00. The $75,000.00 cannot be "stripped off." The rule is that if even one cent attaches to equity, you do not qualify for a "strip off." This means that if your first mortgage on your $300,000.00 home is $299,999.99 or less, the "strip off" provision of the bankruptcy law will not help you.

In conclusion, "lien stripping" may be an effective way to save your home because you are unable to make the second mortgage payments or are in foreclosure. You will be able to lower your monthly payments and eventually entirely eliminate your second mortgage or home equity loan.

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