You may have thought that taking out a second mortgage on your home would be a way to avoid declaring bankruptcy. You may have attempted to access cash to pay off your other high-interest loans or other demanding expenses. However, you may be way over your head with all your accrued debts, and tacking on this second mortgage has likely not helped your case. Well, please continue reading to learn if it is possible to eliminate your responsibility toward a second mortgage and how an experienced Louisville, Kentucky Chapter 13 bankruptcy lawyer at Schwartz Bankruptcy Law Center can help you understand exactly what you are signing yourself up for.
How can I eliminate my second mortgage during Chapter 13 bankruptcy?
Contrary to what you may initially assume, there may be a method of discharging your second mortgage in your Chapter 13 bankruptcy proceedings, known as lien stripping. Lien stripping specifically applies if the amount you owe on your first mortgage is worth more than the current value of your home.
Hypothetically, say that your home is set to be foreclosed on. Well, in this case, your first mortgage lender may get paid from the sales proceeds before your second mortgage lender. With this, likely, your second mortgage lender will not receive anything at all. This makes your second mortgage considered wholly unsecured and thus eligible for lien stripping.
For example, say that your first mortgage loan is worth $300,000, the fair market value of your home is $250,000, and your second mortgage balance is $50,000. In this scenario, you may strip any liens less than your first mortgage loan, meaning that you may eliminate this $50,000 balance from your immediate financial responsibility.
However, say your home’s fair market value is approximately $325,000. If so, you may have to pay off your $300,000 first mortgage loan on top of your $50,000 second mortgage loan. The only thing that may be stripped under these circumstances is a home equity line of credit.
What happens to my stripped liens after Chapter 13 bankruptcy?
To reiterate, if your second mortgage is deemed wholly unsecured, it will be treated the same as your other unsecured debts, such as your credit card debts, medical bills, personal loans, and utility bills. Throughout the Chapter 13 bankruptcy process, you may contribute your little disposable income towards these debts.
But once you reach the end of your three- to five-year repayment plan, you may no longer be held liable for these outstanding balances. In other words, the Kentucky bankruptcy court will order these unsecured debts to be discharged.
After this discharge order, your second mortgage lender will have their lien stripped. Meaning, they must remove their lien from your home, and your home will no longer serve as collateral for your unpaid debt. On theme with a Chapter 13 bankruptcy filing, you will get to keep your home in exchange for complying with the mandatory repayment plan.
If you have made it this far, please do not hesitate to seek further information from a skilled Louisville, Kentucky consumer bankruptcy lawyer. The team at Schwartz Bankruptcy Law Center is willing and able to guide you through your future legal processes.
