If you qualify, stripping a junior mortgage from the title to your home could make it worth saving while making it possible to do so.
In this “Making Sense” series, we’re helping you understand bankruptcy by explaining each of its important concepts through a single sentence. But this concept of mortgage stripping will take two sentences, one to show the huge benefit of stripping your second (or third) mortgage, and the second to explain how to qualify for this mortgage strip.
The two sentences:
If you qualify for removing (stripping) your second or third mortgage from your home’s title, you would not have to pay that mortgage’s monthly payments, and you’d get much closer to building equity in your home but only at the successful completion of your case.
To strip a junior mortgage from your home’s title, the value of the home must be less than the amount owed on the combination of the senior mortgage(s) and other liens that are ahead of that junior mortgage.
Today’s blog post explains the words and phrases in bold in the first of these two sentences. Our next blog post a couple days from now will do the same for the second sentence.
Lien Stripping under Chapter 13
By filing a Chapter 13 “adjustment of debts” case under the right conditions, you can get rid of the debt you owe on a second or other junior mortgage, AND get rid of the lien on your home’s title securing that debt.
Bankruptcy in general is pretty good at getting rid of debt. But what is extraordinary here is how the mortgage lender’s rights against the collateral, your home, are eliminated as well.
That’s rare even in bankruptcy. Usually a lender’s rights to its collateral are respected and preserved—the liens attached to your home, your vehicle, and your other possessions almost always continue in force regardless of your bankruptcy filing. So it’s highly unusual, and hugely beneficial to you to be able to get rid of a junior mortgage debt AND the mortgage lien on your home that otherwise secured that debt.
Not the First Mortgage, Only Second or Other Junior Mortgages
We refer to mortgage lien stripping only of a “junior” mortgage, meaning one that legally comes behind the first mortgage. The first mortgage lender generally has the first right to the equity in a home (after the property tax), the second lender the next right, and so on.
First mortgages liens cannot be stripped, only ones that are junior to that first mortgage.
Mortgage lien stripping can only be done under Chapter 13, not under a Chapter 7 “straight bankruptcy.”
No More Monthly Payments
The immediate benefit of filing a Chapter 13 case with a 2nd/3rd mortgage lien strip is that right away you no longer have to make the monthly payments on that mortgage. You can use that money for other more important debts—such as to catch up on your first mortgage if you’re behind, or to pay back property or income taxes—or to pay for regular monthly living expenses.
And if you were behind on the mortgage payments of the mortgage that you are going to strip, you do not have to catch up on those payments. This is in direct contrast to any first mortgage arrearage, which you would have to pay in full if you wanted to keep the home.
Getting Much Closer to Building Equity in Your Home
If you can get rid of a junior mortgage, that would give you a great leap forward in your efforts at creating equity in your home.
For example, if you had a home worth $175,000, with a first mortgage of $190,000 and a second mortgage of $30,000, with the combined mortgage debt of $220,000, that home would have a negative equity of $45,000 ($220,000 minus $175,000). Once the second mortgage lien would be stripped, the home would have a negative equity of only $15,000 ($190,000 minus $175,000). If the home would increase in value, it would only need to get to $190,000 to begin building equity, instead of $220,000.
Being that much closer to having equity in your home makes saving the home a wiser economic move.
The Stripping Waits Until the Successful Completion of Your Case
Although under a lien strip you would be able to stop paying the monthly 2nd/3rd mortgage payments right away, the actual removal of the lien from your home’s title does not happen until the very end of your Chapter 13 case. That means that you must successfully get there, making all your monthly plan payments and meeting all the other requirements of the 3-to-5-year program.
It’s only then that you get rid of that mortgage’s lien on your home, and get that much closer to having equity in your home
The Sentence Again
The sentence we started with today is by now pretty much self-explanatory:
If you qualify for removing (stripping) your second or third mortgage from your home’s title, you would not have to pay that mortgage’s monthly payments, and you’d get much closer to building equity in your home but only at the successful completion of your case.
Please visit us again in a couple days when we explain how to qualify for this extraordinary benefit of Chapter 13.