Can I Eliminate My Second Mortgage In Bankruptcy

The financial crisis, brought on by the collapse of the housing market has more and more people looking for solutions to their “under water” property. An “under water” property is one in which the debt on the property is greater than the value. Today, millions of homeowner are now upside-down or “under water” on their home mortgage and they are looking for a way out.

Because of drops in value as much as 40 – 50%, the solution for many homeowners is to simply walk away without ever exploring ways to save their home. There are, however, options. They include loan modifications of reduced interest and principal as well as the possibility of buying or cashing out, at great discounts, lenders who would rather have cash than take over an underwater property.

One of the solutions that is not given enough attention, is the possibility of lien stripping a second trust deed through Chapter 13 bankruptcy. Today, if you own real estate with a second or third mortgage, chances are you can remove that lien in a Chapter 13 bankruptcy case. This is because with real estate declining as much as it has, many second mortgages may be considered unsecured and will be treated as such in Chapter 13.

In a Chapter 13 bankruptcy, which is plan of debt repayment over time, liens can be stripped off of the debtor’s assets when there is not enough equity in the asset, after deducting senior liens from current market value, to secure the junior lien full article .

Section 506 of the Bankruptcy Code provides that a lien is only secured to the extent there is value in the asset to which it attaches. If a claim exceeds the value of the collateral, that portion of the claim is considered unsecured. As a result, in Chapter 11 or Chapter 13, even voluntary liens like mortgages and trust deeds can be stripped down to the value of the collateral.

A significant wrinkle exists, however, which greatly limits the ability of a debtor to strip off or wipe out his or her second mortgage or trust deed. As presently enacted, the bankruptcy code prohibits the stripping of liens that are “secured only by a security interest in real property that is the debtor’s principal residence” 11 U.S.C. 1322 (b) (2)