Legally reviewed by Allen A. Kolber, Esq. - The Law Offices of Allen A. Kolber, Esq., P.C.
Key Takeaways
- Chapter 7 cannot strip a second mortgage; only Chapter 13 can.
- It only works if your home is worth less than the first mortgage balance.
- The strip is not final until you complete the plan.
At the time, you may have thought taking out a second mortgage on your home was a financially smart and strategic choice. You may have found yourself in a place with a strong financial footing to tackle a new home improvement project. Or, you may have wanted to access cash to consolidate high-interest debts or pay for other large expenses, all while keeping a favorable interest rate on your first mortgage. Regardless, you may regret that decision and find yourself in a financially critical situation, as serious as facing a Chapter 13 bankruptcy filing. Well, follow along to find out whether you can get rid of your second mortgage with this filing and how a proficient Rockland County Chapter 13 bankruptcy attorney at The Law Offices of Allen A. Kolber, Esq., P.C., can help you successfully execute this.
Can I Eliminate a Second Mortgage in Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is also commonly referred to as a wage earner’s plan or reorganization bankruptcy. This is because debtors are ultimately expected to repay their debts over time in exchange for getting to keep their assets. However, this name may be misleading with regard to your second mortgage. That is, it may be possible for you to get rid of your second mortgage through a strategy known as lien stripping.
With lien stripping, you may be able to reclassify your second mortgage as an unsecured debt. But this is only true if your home’s value is less than the amount owed on your first mortgage. This is because, in this case, your home may be underwater, in that you owe more than what it is worth, and therefore, there is no equity in the property to secure it. With that, your second mortgage may be treated the same as a credit card debt, medical bills, personal loans, utility bills, etc.
When you convert your second mortgage into an unsecured debt, collateral may no longer be tied to it. In other words, your creditor may no longer have the legal right to pursue collection activities against you and attempt to seize your home if your second mortgage remains unpaid. Again, this goes back to the ideal part of opting for a Chapter 13 bankruptcy case rather than Chapter 7, getting to keep your high-value assets like your home during and afterwards.
Why Does This Only Work During Chapter 13?
The chapter you file under decides whether any of this is available, and the answer in Chapter 7 is no. In 2015, the Supreme Court held unanimously in Bank of America v. Caulkett that a Chapter 7 debtor cannot void a junior mortgage, even one that is completely underwater. A 1992 decision had already barred reducing a partially underwater lien in Chapter 7. Together they close the door on lien stripping in a liquidation case entirely.
Chapter 13 is different because the stripping happens through a different provision. Courts have consistently held that a wholly unsecured junior lien is not a “secured claim” protected from modification, and they have continued to allow strip-offs after Caulkett, including here in New York. If a lawyer or a website tells you a Chapter 7 filing will remove your second mortgage, that advice is a decade out of date.
How Do I Successfully Execute Lien Stripping in a Chapter 13 Bankruptcy Case?
You must understand that stripping your second mortgage is not automatically granted to you once you file for Chapter 13 bankruptcy. Rather, you must first properly execute your three- to five-year repayment plan. You generally do have to include unsecured debts, like your second mortgage, in this repayment plan. But you may not have to pay them in full, as after these three to five years pass, any remaining unsecured debt balances may be discharged.
You Have to Request It
Filing the case does not automatically strip liens. Your attorney must file a motion or begin a separate proceeding within your case, asking the court to rule the junior lien wholly unsecured. Your lender will be granted the opportunity to respond.
The Fight Is Over the Appraisal
Ultimately, everything depends on the value of your home on the day you file. If the value exceeds even one dollar of what you owe on the first mortgage, your second mortgage will be partly secured and ineligible to be stripped. You should anticipate that your lender will obtain its own valuation, and that this number will be the contested matter in the case.
The Lien Returns if the Plan Fails
The lien is not stripped until your case is successfully completed. As such, if your case is dismissed or converted to Chapter 7 halfway through, the junior lien will be reinstated in full. This is all the more reason the plan must be one you can actually complete.
What About a Rental or Investment Property?
The protection that prevents you from rewriting your own home loan is not extended to property that you do not reside in. As such, a mortgage on a rental or investment property may be reduced to the current value of the property, and the balance will be treated as unsecured. This is true, regardless of whether or not a junior lien is involved.
For individuals with underwater rental properties in addition to their residence, this is typically the more valuable option.
Contact an Experienced New York Bankruptcy Firm Today
If you have made it this far, please do not hesitate to seek further information from a talented Rockland County bankruptcy attorney. The team at The Law Offices of Allen A. Kolber, Esq., P.C., is willing and able to guide you through your future legal processes. Contact us today to learn how we can assist you through these difficult times.
