How Does Bankruptcy Affect My Second Mortgage?

Many homeowners are in the precarious financial situation where the obligation of their first and second mortgages is causing them to look into Chapter 7 and Chapter 13 bankruptcy information. Many of these homeowners are now “upside down” on their mortgages, meaning they owe more on their home than the current fair market value of the home. If you are in this situation, you may qualify for “lien stripping” of your second mortgage under your Chapter 7 or Chapter 13 filing.

What is lien stripping?
Lien stripping is when the amount owed on a secured obligation (like a second mortgage) is reduced to the current value of the asset. In the situation described above, when a homeowner owes more on their home than it is worth, many times the property is only worth the amount of the first mortgage and sometimes a small percentage of the second mortgage. In this case, the second mortgage may be “stripped” in a Chapter 7 or Chapter 13 filing.

For example:
• Current fair market value of home: $300,000
• First mortgage amount: $300,000
• Second mortgage amount: $75,000
• The property can only be secured for up to $300,000. In a Chapter 13 bankruptcy filing, the second mortgage will be “stripped” and the debt becomes unsecured.
• It is unlikely that the second mortgagor will be able to collect on the now unsecured debt after the bankruptcy discharge, even after the home is sold.

What happens to the second mortgage? If the value of the first mortgage is equal or greater to the value of the home, the entire amount of the second mortgage is reclassified as unsecured debt. If not, part of the second mortgage amount can be secured and the remainder is reclassified as unsecured.

Do I have to repay a lien that has been “stripped”? It depends on the way the bankruptcy court restructures your repayment plan. Most likely, when the second mortgage is reclassified as unsecured debt it will become last priority. In many cases the debt does not have to be repaid at all because the asset that was originally securing it does not have adequate value.

How do I know if I qualify? To find out if your second mortgage could be “stripped”, for Chapter 7 information, Chapter 13 information or any other bankruptcy related questions, you should contact a qualified legal professional. Chang & Carlin LLP have years of experience in the areas of bankruptcy (Chapter 7 and Chapter 13), foreclosure attorney services, and residential real estate law for the Chicago area.

Chang and Carlin
The content found on the Chang & Carlin site is not legal advice and is purely for informational purposes. The information contained herein is not a substitute for the advice of an attorney and does not create an attorney-client relationship. If you are interested in obtaining information about chapter 7 bankruptcychapter 13 bankruptcy, foreclosure services, real estate legal services, you are encouraged to call our law firm at 866-790-8601 or Request a Free Legal Evaluation. Chang and Carlin serves clients in Chicago, Schaumburg, Joliet, Warrenville, Waukegan, Illinois.