Beware Of This Person When Trying To Wipe Out A Second Mortgage In Chapter 13

by Jay Fleischman, Esq.

August 26, 2013

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You can get rid of a second mortgage in a Chapter 13 bankruptcy, but beware the opposing expert.

We’ve talked about dealing with a second mortgage in a Chapter 13 bankruptcy. It can be a simple exercise so long as your first mortgage eats up all of the equity in the home.

If the first mortgage eats up the equity, the second mortgage can be treated the same way as any other unsecured debt in your Chapter 13 bankruptcy. If you’re paying (for example) $0.10 on the dollar to your credit card companies, you pay that same percentage to your second mortgage through your Chapter 13 Plan.

At the end of the case, the balance of the second mortgage gets wiped out.

That is, unless there’s a battle.

Second Mortgage Valuation Is Important

As part of what’s called a “lien strip” you’ve got to prove the value of the property. That valuation should be done with a full-on appraisal rather than a letter from a real estate broker or online valuation service.

The appraisal will cost a bit of money, but nothing compared to the savings you’ll get in the long-run from dumping your second mortgage.

Best bet is to get the appraisal done before your Chapter 13 bankruptcy case is filed. This way, your lawyer has a good idea of what to expect in terms of a result in the lien strip.

The Dreaded Other Side

Nothing’s guaranteed except death and taxes – and lien stripping is neither of those two animals.

Your second mortgage company is going to be affected by your attempt to wipe out their lien on your home, so don’t expect things to go down easy.

The bank can order a separate appraisal and offer it to the court as proof that the second mortgage should not be stripped in your bankruptcy case.

From there, it’s up to the bankruptcy court to decide which appraisal to believe.

Your Best Bet For Lien Stripping

Work with your bankruptcy lawyer to get an appraisal of your home before the case is filed. If the valuation comes back as being close to the balance on the first mortgage, consider whether that appraisal takes into account all factors of valuation.

From there, you and your lawyer can weigh whether attempting to strip the second mortgage is a good move. After all, filing for Chapter 13 bankruptcy for the primary purpose of stripping a lien is only wise if you’ve got a reasonable certainty of success.

Image credit:   Paul J Everett

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.

Last modified: August 26, 2013