Do you have a Junior Mortgage on Your House?

Lien Stripping in Chapter 13

One of the great advantages of a Chapter 13 bankruptcy at this time is ability to strip a lien on your principal residence that does not attach to any equity. Here is a common example: Principal residence has current fair market value of $300,000. The first mortgage has a balance of $400,000 and the second mortgage has a balance of $100,000. Because the second mortgage does not attach to any equity in the property, the lien can be avoided or “stripped” in a Chapter 13 thereby removing the balance of $100,000 at the completion of the Chapter 13 case.

When does a Chapter 13 lien stripping case make sense? First, the principal residence must be your principal residence i.e. where you sleep at night. Second, you don’t want to file a Chapter 13 to strip a lien unless you really, really want to stay in this house. Third, the balance on the junior lien needs to be large enough combined with other debt to make a Chapter 13 advantageous i.e. you don’t want to file Chapter 13 to avoid a lien of $10,000. 

If a Chapter 13 is sounding like something that might work for you, there are several other things to consider. First, we must make sure all of the owners of the property and all of the people who signed on the mortgage note at we need to strip are filing bankruptcy. For example, if the property is owned by both you and your spouse, we cannot strip off the mortgage unless both of you are filing bankruptcy. Second, in order to strip off the mortgage, we have to prove that your real property is not worth more than the payoff balances on the other senior mortgages. That is, we need to prove that there is no value, not even one dollar, left in your real property to “secure” the mortgage we are trying to strip in the Chapter 13. Third, you need to have a “real” senior mortgage or at least a reasonable “hope” of you through a modification. The best senior mortgages for lien stripping cases are 30 year fixed that you can really afford or a mortgage that has been modified into a loan you can afford. If the senior mortgage is going to reset into a payment you cannot afford in 1,2,3 or 4 years, there is no reason to spend the money to strip a junior lien and then lose the house to a foreclosure by the senior lender later.

In conclusion, there has never been a better time for Chapter 13 lien stripping cases. Home values are low and the number of junior liens that do not attach to any equity are at an all time high. This is truly the lemonade out lemons recipe if you are intending on staying in your current residence and meet the requirements for a Chapter 13. Prior to simply walking away for your current residence, it may be a good idea to consider a Chapter 13 and see what it can do for you.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A SHORT SALE OR FORECLOSURE. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.

© 2010 Joan Grimes