Here at Bankruptcy Law Network, we have posted extensively about how in a chapter 13 case a second mortgage can be “stripped”, that is, treated as an ordinary unsecured debt. That is a powerful incentive to choose a chapter 13 if you can “strip” your second mortgage.
Recently, my colleague Jay Fleischman posted about the Battle of the Experts and how that can impact your chapter 13 case. Just to recap, if you own your home and you owe more on your first mortgage that your house is worth, that is, you are underwater, you can propose to treat your second mortgage like any other unsecured creditor! So, if you are proposing to pay your unsecured creditors 10 cents on the dollar through your chapter 13 plan, that is what your second mortgage will be paid and, upon successful completion of your plan, the mortgage will be discharged. The key is that you owe more on your first mortgage than what your home is worth. If there is $1.00 of equity for that second mortgage to attach to, you cannot strip the second mortgage.
So, Jay Fleischman offers some practical advice about getting an appraisal done prior to filing bankruptcy if, in consultation with your lawyer, you are going to attempt a lien strip. Good advice. But, as Jay says in his post, beware the opposing expert.
So, if you are faced with a competing expert as to the value of your home, is all lost in your quest for a lien strip? No, but it may not be as great as you would hope (but pretty good nonetheless). It is all a matter of leverage.
So what is that leverage? Well, if the court accepts your expert, then the mortgage will be deemed unsecured and you pay pennies on the dollar (if even that). If the court accepts the bank’s expert, then there can be no lien strip and you have to pay the mortgage in full.
Well, obviously, you are in some financial difficulties or you would not be in bankruptcy in the first place. So, your leverage is that you will agree to pay a lesser amount on the mortgage but more than you would under lien strip. So, if your second mortgage is $45,000.00, you might agree to pay $15,000.00 over the life of your plan or outside the plan. The bank would have to agree this proposal in order to finalize it.
So why would the bank do that especially if they feel confident as to their appraisal? Well, it is close call as to your property’s value in the first place or you would not be attempting a “lien strip.” If the court agrees with your valuation, the bank gets the shaft. If the court agrees with the bank’s valuation, you are stuck with the second mortgage.
If you are stuck with the second mortgage, that may make your chapter 13 plan unaffordable or your house unaffordable. If your plan or house is unaffordable and you stop making payments on the first mortgage, the creditor may ask the court to allow it to foreclose. If that happens, most likely the second mortgage would not get anything out of their collateral. The second mortgage wins the issue on the lien strip but still gets the shaft. Therefore, the second mortgage creditor may be willing to reduce the amount owed to make it affordable so that they get something out of the deal. Leverage.
So, your willingness to walk away from the house in a “lien strip” situation may provide you with leverage to negotiate a deal on your second mortgage.