Many people have been hurt by the subsequent crash in the housing market.  Many people have homes that have a 1st and 2nd mortgage, whereby it will be decades before they have equity in their home again.  A 2nd mortgage lien cannot be erased by filing a Chapter 7 Bankruptcy, however an individual can be strip a 2nd mortgage lien from their home by filing a lien avoidance motion in a Chapter 13 Bankruptcy. 

A 2nd mortgage can be erased in a Chapter 13 if the 2nd mortgage is A). attached to your primary residence, and B). the 1st mortgage’s balance exceeds the fair market value of the home.   In the event of a foreclosure sale of your home, the 1st mortgage is paid first from the proceeds of the sale before the 2nd lien.  Only after the 1st Mortgage is satisfied in full by the proceeds of the sale and there are funds left over to be paid does the 2nd mortgage recieve any money.  Therefore, if the home’s value is less than the principle balance owed on the 1st mortgage, the 2nd mortgage would recieve no funds in the event of a foreclosure sale, because the entire amount paid for the home would go to the 1st mortgage, leaving nothing left for the junior lien 2nd mortgage. 

Example:  If your home has a 1st mortgage with Wells Fargo Bank with a principle balance of $400,000, a 2nd Mortgage with Chase with a Principle Balance of $125,000, and the home’s fair market value is $325,000, then the 2nd mortgage would recieve nothing in the event of a sale, because the 1st mortgage owned by Wells Fargo would recieve the entire $325,000, thus leaving nothing for the 2nd mortgage owned by Chase. 

When you file a Chapter 13 Bankruptcy, you must file the ordinary schedules as one would in a Chapter 7 Bankruptcy, however unlike a Chapter 7 Bankruptcy, you must repay some of your debts through a repayment plan.  When you file a Chapter 13 Bankruptcy Petition, you must draft a proposed plan which lays out the amount you will pay each month to the Chapter 13 Trustee for your creditors, and the exact amount you will pay to each different type of creditor (i.e. unsecured non-priority, unsecured priority, and secured debts) over the life of the plan.   

When drafting the Chapter 13 plan whereby you are stipping a 2nd lien mortgage, you must provide special notice to the servicer of the 2nd Mortgage that the Chapter 13 plans to avoid the lien pursuant to 11 USC 1322(b)(2).  After you file your Chapter 13 petition and plan, the debtor must file a Lien Avoidance Motion, whereby the Debtor makes a motion to value the collateral (i.e. value the home), thereby showing the court that the home is worth less than the 1st mortgage, making the 2nd mortgage unsecured, thereby qualifying the 2nd lien to be stripped and discharged upon completion of the Chapter 13 plan and subsequent discharge. 

If your home is upside down and you have a 2nd mortgage and you would like to know whether you qualify to strip your 2nd mortgage from your property, then Call the Bankruptcy Law Center at 1-800-551-7922 to set up a FREE consultation in order to see if you qualify.