When it comes to bankruptcy, one of the most common questions our firm receives is “can bankruptcy eliminate mortgages from my home?” The answer is yes, but under specific circumstances.
If your house has decreased in value since you purchased it, a Chapter 13 bankruptcy may help you get rid of their junior liens, such as a second or third mortgage. This is done through a process known as “lien stripping,” which essentially takes your second mortgage (secured debt) and converts it to an unsecured debt by ordering the lender to eliminate its lien from the property.
So if you have a first and a second mortgage on your house, in order to be eligible for lien stripping, your first mortgage balance must be more than what your house is worth prior to eliminating your second mortgage. If you have three mortgages, then you can strip both your second and third mortgages if your first one is greater than the value of your home. Keep in mind, if your house is worth more than your first mortgage alone, but not more than the combined balance of your first and second mortgages, then you can only strip your third mortgage.
When the second mortgage becomes unsecured debt, you don’t have to make payments on this debt outside of your bankruptcy. Rather, you will pay a portion of this unsecured debt—typically a small amount—through your Chapter 13 plan. Once the plan is complete, whatever you have remaining on the mortgage will be discharged.
Lien stripping is not allowed in Chapter 7 bankruptcy cases. However, if you live in Alabama, Florida, or Georgia, you might be able to remove second and/or third mortgages through Chapter 7.
For more information about filing Chapter 13 bankruptcy in Richmond, VA, contact Bruce W. White, P.C. today.