What Will Happen to My Second Mortgage During Bankruptcy?

If you are considering bankruptcy, you have a second mortgage on your home, and you live in New York, you need to ask your bankruptcy lawyer about lien stripping.

 What is Lien Stripping? 

Lien stripping is part of a process that transitions your second mortgage from a secured loan to an unsecured loan. This option is only available under certain circumstances:

• You are declaring Chapter 11 or 13 Bankruptcy. Lien stripping is not allowed under Chapter 7.*
• The total assessed value of your home is LESS than the value of your first mortgage. For example, if your home is currently worth $400.000.00, and you owe $450.000.00 on your primary mortgage and $50,000.00 on your second, you would be able to have your second mortgage stripped.

 How Does This Process Work?

As part of the debt restructuring process (Chapters 11 and 13), your second mortgage can be turned into an unsecured loan (like your credit card debt).  When working with your bankruptcy attorney to create a repayment plan, you should be able to determine if you qualify for lien stripping. If you do, your bankruptcy lawyer should be able to calculate a reduced percentage of payment based on whichever is larger – your actual income or the equity you have in any assets you own. This may allow your bankruptcy attorney to negotiate down the money you own on unsecured debt (including the second mortgage) to pennies on the dollar.

You will be responsible for paying down these negotiated payments during the bankruptcy process (which usually takes around five years). If you successfully complete your bankruptcy plan, your second mortgage may be considered completely discharged.

Learn more about Chapter 13 Bankruptcy Basics here

Learn more about Chapter 11 Bankruptcy Basics here 

 What Could Go Wrong?

Nothing is ever easy when it comes to the law which is why you’ll need the right bankruptcy attorney by your side. Here are some challenges you may face:

• The court will send an appraiser to your house to determine its current value. That appraisal may be higher than you expected. Using the example above, your house may be appraised at $455,000.00. This would make lien stripping your second mortgage impossible.
• The holder of your second mortgage may reject your bankruptcy plan. Any lender you owe money to has the right to explain to the court why their loans should be paid in full. This is why having a bankruptcy attorney who is an experienced negotiator is so important. And if the court feels that your reorganization plan is fair, they can force a lender to accept the plan in what’s called a cramdown.
• Your bankruptcy case may be dismissed before the completion of your plan. Your case could be dismissed for a number of reasons including:
  • You were shown to have committed fraud
  • You stopped paying according to your plan
  • You didn’t file the right documents and didn’t pay your fees
  • You didn’t attend the mandatory education courses

If your case is dismissed before your bankruptcy plan is completed, your second mortgage, as well as the rest of your original debt, will now be due. The court treats dismissal as if your bankruptcy case never happened.

What to Do Next

Thousands of Americans just like you are struggling with debt. Choosing to restructure your debt via Chapter 11 or 13 bankruptcy may be a way to reclaim control of your life. For a free consultation, reach out to New York bankruptcy lawyer Ronald Weiss. He can work with you to find the best way to get you back on track and help you get your case started. Call 631-825-8214 and take the first step to a fresh start.

* To learn more about why liens cannot be stripped in Chapter 7 bankruptcies, review Dewsnup v. Timm, 502 U.S. 410 (1992).