Chapter 13 and stripping a 2nd mortgage

Date: Wed, 04/29/2009 - 17:17
Submitted by on Wed, 04/29/2009 - 17:17
Posts: 202330
Credits:
[Donate]

From what I have read online in various blogs/forums you can strip a 2nd mortgage off in a Chapter 13 if the value of the house doesn't cover the 2nd mortgage at all. Thus making it an unsecured debt.

Our lawyer has told us that nothing has been passed by the government allowing this to happen, unless it is lender approved.

Is this true ? We live in Virginia if that makes a difference.

I am wondering if this is just something that is hard (but not impossible) to get done and our lawyer doesn't want to fool with it.

Thanks for your input !!


I did some looking around the net for you and I found this information:

here is some basic information about doing chapter 13 lien strips.

Applicable BK code section. 1322(b)(2).

What is it: In a nutshell, you can remove an inferior lien (i.e. 2nd mortgage, HELOC etc), from your primary residence in a chapter 13 if the value of your home is less than the superior lien (i.e. 1st mortgage)
Example, Home A
1st Mortgage, $160,000
2nd Mortgage, $40,000
Home Value, $155,000
In a chapter 13, you can remove the 2nd mortgage on Home A
Home B
1st Mortgage $180,000
HELOC $50,000
Home Value $190,000
You CANNOT strip the HELOC from Home B, nor can you reduce the principle amount of the HELOC.

What you need to do to strip a lien:
1. Pay for a professional appraisal of your home from a certified appraiser.
2. File your chapter 13 BK and state in your chapter 13 that you are striping the lien
3. File a motion to remove the lien (attaching a copy of the appraisal).
Local procedures may vary on exactly what you need to do.

RISKS (the catch).
In order for the lien strip to stick, you must receive a discharge of your chapter 13. If your chapter 13 is dismissed or converted to a 7, you will lose the lien strip and more than likely lose your home because you have not been paying your 2nd mortgage during the chapter 13 (it would be very hard to get caught up). If during the chapter 13, you become eligible for a chapter 7, you should first look at requesting a hardship discharge of your chapter 13 under BK Code 1328(b) to preserve the lien strip.

Thus, even if you are eligible for a lien strip, if your budget is tight or there is a greater than average risk of you not being able to complete the 13, a lien strip may not be in your best interests (assuming you want to keep the home). After all, only about 40% of chapter 13's actually make it to discharge.

Note, these rules do not apply to investments properties, you can modify the mortgages of investment properties in a chapter 13.


Submitted by lmale on Wed, 04/29/2009 - 17:34

lmale

( Posts: 742 | Credits: )


I have yet to get a straight answer on this from lawyers. This is the best response so far.
Any advice on a Ch 7 and if it can still be done? Especially if you're upside down on the 2nd and the 1st by 100 grand?


Submitted by on Tue, 05/26/2009 - 23:23

( Posts: 202330 | Credits: )


Only on a chapter 13 in most cases unless they pass the cramdown laws for the BK but so far they have not as of this time.
I have seen the actual mortgage company lower the rate and the balance if it is in the case of a hardship.


Submitted by crestoration on Fri, 05/29/2009 - 15:42

crestoration

( Posts: 17 | Credits: )