Lien Stripping Second Mortgage in Bankruptcy

lien stripping second mortgage

Lien Stripping Second Mortgage in Bankruptcy

lien stripping second mortgageIs it possible to eliminate a second mortgage through an Arizona bankruptcy? That’s a question that bankruptcy attorneys in the state get often. The short answer is yes. The longer answer depends on several factors.

Can a Second Mortgage Be Eliminated through a Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy is a liquidation type of bankruptcy. Typically, second mortgage junior liens and HELOCs cannot be eliminated through this chapter.

One exception exists, however, and this exception is called lien stripping.

Lien stripping allows debtors to eliminate wholly unsecured debt like a second mortgage or a home equity loan. Typically, this option is available to people who do a Chapter 13 filing in Arizona. The 11th circuit, however, has recently allowed Chapter 7 lien stripping in several states.

In Arizona, lien stripping for a second mortgage can be negotiated by paying a small, fixed amount to the company that provided the mortgage. This is the main difference between Chapter 7 and Chapter 13 lien stripping. In the second case, the process will be directed by the Arizona bankruptcy court.

This is a special process and an exception rather than the general rule. Hence, you need to get in touch with an experienced Arizona bankruptcy attorney to get a good idea about the options ahead of you and whether getting rid of a second mortgage would be plausible.

Second Mortgages and Chapter 13 Bankruptcy

Lien stripping is much more common in the case of a Chapter 13 bankruptcy filing.

Through the process, people can get rid of a junior lien like a second or a third mortgage on a property. In the process, the Arizona bankruptcy court will convert the second mortgage into unsecured debt by ordering the lender to remove its liens from the property in question.

The procedure will work solely if your second mortgage’s amount exceeds the property’s market value.

This means that if your first mortgage exceeds the property’s market value, you can strip a second and even a third mortgage during the Chapter 13 bankruptcy process.

Once the process is completed, the second mortgage will be treated as nonpriority, unsecured debt. This unsecured debt is added to the bankruptcy estate and used to determine the monthly instalments that the debtor will have to make under the Chapter 13 payment plant.

The end of the Chapter 13 payment plan (it usually occurs within three to five years) will mark a discharge of remaining debt amounts.

Keep in mind that lien stripping works only in cases when a Chapter 13 payment plan is completed. If your bankruptcy case gets dismissed before the end of the respective period, you will not see the stripping of your second mortgage.

Ensuring Financial Stability through Bankruptcy

As you’ve seen already, it’s possible to address multiple mortgages through the right type of bankruptcy filing in Arizona.

When you’re dealing with various types of debt and you’re in a complex financial situation, talk to a bankruptcy attorney. This is especially important for people who qualify for a Chapter 7 bankruptcy. In some instances, a Chapter 7 filing isn’t in the best interest of the debtor. It could also contribute to complex procedures before second or third mortgages get stripped.

Bankruptcy can help you save your home and avoid foreclosure. Still, you have to decide whether to do a Chapter 7 or a Chapter 13 filing.

If you’re going through a foreclosure already and you owe more on your first mortgage than the fair market value of your home, junior lienholders would not get anything. Your second mortgage would quickly become unsecured, giving you the right to petition the bankruptcy court and get rid of this junior lien altogether.

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