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How Can a Debtor Strip a Second Mortgage?

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How Can a Debtor Strip a Second Mortgage?
In today's housing market, many Debtors owe more on their house than the house is actually worth, and many people have second mortgages against their house.  You can determine what a house is worth by getting an appraisal or checking on what houses in the neighborhood have been selling for, etc.  When a person is underwater on a house, often because of a second mortgage on the residence, they can feel like their options are limited.  Many debtors think their only option is to surrender the home through the bankruptcy or pay on both mortgages until the home is paid off.  However, these debtors may have another option.
The solution to this problem may be to strip the second mortgage on the real property.  This can be done in a Chapter 13 bankruptcy when the first mortgage on the property meets or exceeds the value of the property, thereby rendering the second mortgage unsecured.  A debt is secured when it is attached to a piece of collateral, such as a house.  A debt is unsecured when it is not attached or secured by a piece of collateral, such as a credit card or medical bill.  When the first mortgage exceeds the value of the real property, the second mortgage becomes unsecured.  According to Section 506 of the United States Bankruptcy Code, a lien can only be secured by collateral if there is enough value in the collateral to cover that lien.  Therefore, the second mortgage becomes unsecured.  For example, if a house is worth $90,000, the first mortgage is $95,000, and the second mortgage against the property is $20,000, the $20,000 mortgage becomes unsecured and can be stripped in a Chapter 13. 
When the second lien is stripped, the Chapter 13 debtor would pay back the first mortgage but would not be required to pay back the second mortgage and would still be able to keep the real property.  In order to strip a lien, the Chapter 13 Trustee may require a debtor to show proof of the value of the house so they can ensure that the second mortgage is completely unsecured and able to be stripped.  Debtors should understand that there are limitations.  If a debtor has refinanced the property, they will not be eligible for lien stripping.  Additionally, if the second mortgage is not completely unsecured, lien stripping will not be a good option.  If you would like more information about this, please contact a St. Louis or St. Charles bankruptcy attorney.

Category: Bankruptcy

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