Sunday, May 15, 2011

'Lien Stripping' In Bankruptcy Proceedings A Quick, Easy Way For Homeowners To Void Completely Underwater 2nd Mortgages; Helps Avoid Foreclosure

The San Jose Merury News reports:

  • Stung by the crash of the housing market, some struggling homeowners are using a little known but increasingly popular provision of the bankruptcy code to eliminate second mortgages and avoid foreclosure.
  • Statistics are hard to come by, but bankruptcy lawyers say the provision has been used effectively on hundreds, if not thousands, of cases in the [San Francisco] Bay Area during the past two years.
  • "It's a big thing in our valley," said James "Ike" Shulman, a San Jose bankruptcy lawyer. "But it's not widely known." Shulman, co-founder of the National Association of Consumer Bankruptcy Attorneys, said he has helped a number of clients who have filed for personal bankruptcy use the law to hold on to their houses -- including three last week.
  • Cathy Moran, a Mountain View bankruptcy lawyer, said one of her clients had a $132,000 second mortgage voided by the court. "This is a really big-ticket issue that allows people to keep a home and conform the mortgage to something closer to real value," Moran said.
  • Bankruptcy laws prevent homeowners from eliminating the debt of a first mortgage if they plan to stay in their home. But second mortgages are treated differently. They can be declared unsecured debt when there is no equity to cover them, as is the case for millions of houses that are now worth far less than a few years ago.
  • When that happens in a personal bankruptcy proceeding, the second mortgage is put on hold and no payments are required while the homeowner completes a repayment plan for other debts -- which typically takes three to five years. At that point, the second mortgage is eliminated.


  • One of Shulman's clients, [...] was struggling to keep the San Jose house she bought in 2005 for $612,000. Her home's value has dropped to about $367,000 -- less than her first mortgage of $489,000 -- which allowed her to petition the bankruptcy court to set aside her $122,000 second mortgage. The court granted her motion. She successfully completed her payment plan for other debts two months ago, and her second mortgage is now eliminated.


  • The law has been like this for years, bankruptcy lawyers say. It's just never been used as much because in the past there was usually enough equity in a home to cover the second mortgage.
  • "We're having great results" using the rule, said Brette Evans, a San Jose bankruptcy lawyer. In one recent case, a small-business owner was able to hang on to her home by setting aside a $240,000 second mortgage, she said. That put the borrower in "a safe zone" where she could work out a modification of her first mortgage, Evans said.

For the story, see Bankrupt Bay Area homeowners shed second mortgages.

Go here for more on 2nd mortgage lien stripping in bankruptcy proceedings.

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