A Very Special Way Chapter 13 Saves Your Home
Sept. 7, 2010
In our last blog we said that Chapter 13 can “sometimes get you out of having to pay your 2nd or 3rd mortgage ever again.” This “junior mortgage lien stripping” is a truly unusual twist in the law that could save you tens or even hundreds of thousands of dollars. Here’s how it works.
1) This “twist” ONLY works in Chapter 13 (the 3-to-5 year payment plan), NOT in Chapter 7 (“straight bankruptcy”).
2) It only works for “consensual liens” –mortgages or trust deeds or equity lines of credit that you signed on to voluntarily. (Sometimes certain other kinds of liens can be gotten rid of with different procedures. For example, see our next blog on judgment liens.)
3) This only works IF AND ONLY IF ALL of the equity in the home is COMPLETELY covered by the “senior” mortgage(s), leaving not a penny of equity to cover the next-in-line mortgage or line of credit being “stripped.”
Example: You bought your home a few years ago for $350,000, with a $280,000 first mortgage and a $50,000 second mortgage, but it’s now worth only $270,000. You now still owe $278,000 on the first mortgage, since almost all of the payments have gone to interest. Chapter 13 would enable you to “strip off” that $50,000 second mortgage. Meaning that instead of having to pay that “junior” debt in full, along with interest and often late fees and other charges, you would only have to pay as much as you could afford during the life of the Chapter 13 case, IF ANY, and then the entire debt would be permanently written off.
This great result is highly unusual for two big reasons:
1) In life, and even in bankruptcy, usually you can’t get out of paying “secured” debt—those attached to collateral like a car loan or home mortgage. If your debt is secured, almost always you must either pay the debt so that you can keep the collateral or surrender the collateral to that creditor. That’s because you had secured your obligation to pay the debt by giving the creditor a right to your property.
2) Debts secured by your home are especially tough to undo. Congress has decided that otherwise banks and investors would be reluctant to invest their capital in the mortgage markets, supposedly leading to higher mortgage interest rates and less people being able to qualify.
This all makes Chapter 13 “junior mortgage lien stripping” so unusual and so valuable.
Portland Bankruptcy Law Group has the experience and knowledge to handle your case. Our bankruptcy attorneys are extremely familiar with and are well versed in all aspects of bankruptcy law. Contact us today!