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Bankruptcy & Second Mortgages Attorneys Serving Clients in Scranton
Helping You Restructure and Reduce Debt
If your house is worth less than you owe on a first mortgage, and if you qualify for Chapter 13 bankruptcy, then you can use bankruptcy to completely cancel your second mortgage. Why? Because the U.S. Bankruptcy Code recognizes the reality of the financial situation.
If you were to surrender your home in a foreclosure, it would not sell for more than its worth. In other words, it would sell for less than what you owe on the first mortgage, and the second mortgage would be wiped out in the foreclosure sale.
The holder of the second mortgage company would receive nothing. And, because you filed bankruptcy, that second mortgage company would not be permitted to pursue you personally for the money.
How Does A Second Mortgage Work?
For example, consider a homeowner with a house that is worth $80,000, but $85,000 is owed on the first mortgage (the older mortgage). If there is a second mortgage, then that mortgage can be canceled in a Chapter 13 bankruptcy case.
The amount that is owed on the second mortgage won’t matter. All that matters is that the value of the house ($80,000) is less than the amount that is owed on the first mortgage ($85,000).
This works the same way for third mortgages. If the sum of the first two mortgages is more than the value of the house, then the third mortgage can be canceled.
Only Chapter 13 offers this option. Chapter 7 will not allow you to eliminate a second and/or third mortgage. Keep in mind that you can only remove a second and/or third mortgage if you are upside down, meaning you owe more than what your home is worth.
What Is Lien-Stripping?
Lien-stripping is simply another term for the above process (canceling a second or third mortgage through bankruptcy).
A lien is an entity’s legal claim to your property. It can be either:
During the lien-stripping process, the bankruptcy court orders the second or third mortgage lender to remove the lien they have on your property.
This process essentially converts the mortgage from secured debt (i.e. debt that is backed by collateral) to unsecured debt (i.e. debt that is NOT backed by collateral). The mortgage can then be discharged along with other unsecured debt once you complete your Chapter 13 plan.