Is your house under water?
Many people may be able to keep their homes while eliminating (mortgage stripping) their second mortgages entirely. This process is
commonly called “lien stripping” and is available when the value of your house is less than what you owe on your first mortgage. In such cases, mortgage stripping is available because the second mortgage is wholly unsecured — meaning there is no equity in the house to cover any portion of the second mortgage.
Permanent mortgage modifications rarely happen in reality. Don’t rely on empty promises from your mortgage company. Mortgage companies have been sued for misleading consumers into thinking they’re going to get a mortgage modification, then suddenly foreclosing the property out from under the homeowner.
The only realistic way to save your house when foreclosure has already been initiated is through Chapter 13 bankruptcy. Even if you have too much equity for mortgage stripping, mortgage arrearages (missed payments) can be paid over five years in a Chapter 13 bankruptcy reorganization plan. The bankruptcy must be filed with the court prior to the public sale date set by the public trustee in the county where your home is located. Filing the bankruptcy stops the sale and allows you to include the past due payments in a Chapter 13 bankruptcy reorganization plan.
Mortgage stripping is only available in a Chapter 13 case. In the 1980s, mortgage stripping was accomplished in Chapter 7 until the U.S. Supreme Court ruled otherwise so now Chapter 13 is the only option for mortgage stripping.
However, if you have a large second mortgage, it is well-worth filing a Chapter 13 plan and in most cases making relatively small payments in order to remove or eliminate your second mortgage. Chapter 13 bankruptcy does NOT mean that you have to repay your debts. One of the common misconceptions people hold about filing Chapter 13 is that creditors have to be repaid in full. In the vast majority of cases, creditors only receive pennies on the dollar in Chapter 13. In summary, whether or not you can eliminate your second mortgage, a Chapter 13 bankruptcy will enable you to forget about all past due mortgage payments and you can start fresh making your regular monthly mortgage payment after your Chapter 13 case is filed. Contact us for an office visit and all the details.
The details on mortgage lien stripping. Chapter 7 bankruptcy does not enable a debtor to eliminate, strip, modify, or otherwise alter a mortgage obligation in any way. The sole options under Chapter 7 are to pay as agreed and keep the house or don’t pay and surrender the house back to the mortgage company. This is not the result of any plain language in the bankruptcy code but is the result of a 1992 U.S. Supreme Court case entitled Dewsnup v. Timm located at 502 U.S. 41.
The net result of Dewsnup is that mortgage stripping is only available in Chapter 13 bankruptcy cases, not in Chapter 7 cases. Further, it is an all-or-nothing proposition in Chapter 13. The second mortgage can either be eliminated ENTIRELY or not at all. This means that the balance payable to the second mortgage holder cannot be partially reduced. The second mortgage is either eligible for complete elimination (mortgage stripping) or it isn’t.
To determine whether mortgage lien stripping (complete elimination) is available, the debtor must be able to proof that the house is worth LESS than what he or she owes on the FIRST mortgage obligation. For instance, let’s assume the house is worth $100,000 and the first mortgage payoff is $125,000 followed by a second mortgage which has a $30,000 payoff. Under this scenario, the second mortgage on the residence is wholly unsecured (not collateralized by any value in the house). Therefore, in this example, the debtor could write off the second mortgage entirely regardless of the size of the second mortgage.
Mortgage stripping does not happen automatically when a Chapter 13 bankruptcy is filed. Your Denver bankruptcy attorney must file a “Motion to Determine Value of Property” to establish that the second mortgage can be stripped. This is also referred to as a “506 Motion” in reference to 11 U.S.C. 506
Prior to filing this motion, a market valuation of your property is obtained. Ordinarily, a real estate professional prepares a written Certified Market Analysis. This CMA should establish that the property is worth less than what is owed on the first mortgage. This CMA is ordinarily all that is required to successfully strip a second mortgage.
Once a bankruptcy judge enters an order lien stripping your second mortgage, all payments must be completed under your Chapter 13 bankruptcy reorganization plan. Otherwise, the mortgage survives and continues to encumber your property.