13 Jan Bankruptcy can remove my Second Mortgage?
If you own real estate with a second or other subsequent mortgage after your first, chances are you can remove that lien in a Chapter 13 Bankruptcy Case. This is most common these days as a result of the declining real estate market. In many instances, at least locally in San Diego County, we are seeing real estate values at 2004/2005 levels.
With real estate declining as much as it has, most second and other mortgages we see beyond the first are wholly unsecured. In fact, in many cases, we are finding that even the first deed of trust/mortgage on the property is greater than the value of the house. So how can you avoid a second lien on real estate? Its thru a little code provision in Chapter 13 called 11 USC 1322.
For example: Suppose a debtor purchased a home at the top of the market towards the end of 2006 for $900,000.00 in Carlsbad, CA. They purchased the house with a $700,000 first deed of trust from Countrywide and $200,000 second deed of trust from Wells Fargo. Suppose now, in 2008, the house has now dropped to $690,000. Since the second of $200,000 is not secured by the real estate anymore, they are considered “wholly undersecured.” In chapter 13, you can “avoid” a “wholly undersecured” lien on your personal residence. If one were to avoid the lien, then they would now have a house valued at $690,000 with only a first deed of trust for $700,000. The $200,000 second was “stripped” from the property and is treated as an unsecured creditor in the chapter 13 case no different than a Citibank Mastercard.
While lien stripping is most common on undersecured mortgages, there are also several other ways to avoid second mortgages in Bankruptcy. Other examples of lien stripping can take place if 1) there is a balloon payment due during the life of the chapter 13 case, 2) the second is secured by other assets in addition to the house (personal property, road, ally, etc.), or 3) the property is not the “debtor’s principal residence.” Moreover, if you are a farmer and file chapter 12, you can avoid all liens down to the fair market value of the property!
So while many people are starting to surrender their real estate back to the bank, think twice before you make your decision and speak with a competant bankrutpcy attorney. You just might be able to remove the second mortgage and keep the house with a more affordable mortgage payment!
Written by Michael Doan
Bankruptcy Law Network (BLN)
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