If, like tens of thousands of others, you\’ve found yourself in the unfortunate position of living in a home which is now worth less than the mortgages you\’re paying on it then you may want to consider an option of personal bankruptcy. In situations like this you might feel you\’re going to be financially crushed by the sheer weight of your debts, especially your second or third mortgages. The good news, however, is that it is legally possible to have second and third mortgages written off as part of your bankruptcy filing – a process known as \”lien stripping\”, or \”mortgage stripping\”.
Valuation
To be entitled to write off a second or third mortgage the amount you owe on your first mortgage must be greater than the value of your home. So let\’s assume you own a home valued at $220,000 which has a primary mortgage of $250,000 and a second mortgage of $30,000. In this case your total mortgage debt is $280,000, which means you can ask for your second mortgage to be written off as part of your filing because your second mortgage has not equity to support the lien.
The same basic rule applies if you have a third mortgage. So again if we take the above example of a home valued at $220,000, with a primary mortgage of $250,000, a second mortgage of $40,000 and a third mortgage of $10,000. Your total mortgage debt here is $300,000, meaning that you can request the second and third mortgages be stripped.
On the other hand if you have a home valued at $250,000 with a primary mortgage of $200,000 and a second mortgage of $45,000 you won\’t be eligible to have the second mortgage removed because the value of your home is greater than the total amount of your primary mortgage. The rule is that even if second or third mortgage has any equity to support it then that mortgage may not be stripped off.
In certain circumstances the court can ask that you present a current valuation of your home. This is usually requested by creditors who are trying to prove that you\’re not a suitable candidate to have your second and third mortgages stripped off.
When The Strip Happens
When you file for Chapter 13 bankruptcy the courts will convert your second or third mortgages to an unsecured debt, which then becomes part of your overall payment plan. The immediate benefit here is that you don\’t have to pay those mortgages from that point onwards, except for a few cents on the dollar. Then once you complete your entire repayment plan you won\’t owe a single cent on anything except your primary mortgage.
Please bear in mind that until your debts are fully discharged by the courts that your additional mortgages will not be stripped. This makes it in your best interests to stick to your repayment plan with your creditors and complete it.
It\’s also worth noting that mortgage stripping is only available as part of a Chapter 13 filing in almost every state of the union, although there are some limited exceptions to this rule. Mortgage/lien \”stripping\” can and will be handled differently depending on which court and state you file your casein, so it\’s wise to seek the counsel of a professional bankruptcy attorney before commencing your bankruptcy filing.