Lien Stripping Of Completely Underwater 2nd Mortgages, HELOCs Can Convert Some Home Loans To Unsecured Debts In Chapter 13 Bankruptcy Proceedings

In Bradenton, Florida, bankruptcy attorney Cynthia A. Riddell writes in the Bradenton Herald:

• The current law prohibits stripping or modification of first mortgage liens on a Chapter 13 debtor’s primary residence. However, in many bankruptcy districts, [...] you can modify or “lien strip” a second or other subordinate mortgage which is not supported by any value in the property over the amount owed on the first mortgage. Under the current bankruptcy law, a second mortgage that is completely [underwater] can be stripped and reclassified as unsecured in a Chapter 13 bankruptcy case and, in most cases, paid only pennies on the dollar, while the homeowner keeps the home! The caveat is that the debtor in Chapter 13 must complete the plan in order to benefit from this action.

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• This lien stripping tool may be helpful to homeowners with home equity lines of credit secured by a second mortgage on their primary residence or homeowners that purchased the home using the 80/20 loans with the simultaneous second mortgage funding that enabled borrowers to get 100 percent financing. If such a lien is stripped in a Chapter 13, it can be treated as an unsecured debt in the Chapter 13 plan and paid the dividend amount provided for all unsecured claims over five years. The second mortgage holder would be paid only a fraction of the total amount of the loan.

For the column, see Lien stripping among Ch. 13 provisions.

In a related story, see Court Strips Second Mortgage In Chapter 7 Bankruptcy. Is It Precedent?