Most of the clients I speak with our concerned about keeping their home. Some have tried to negotiate with banks to modify their mortgages. Our loan modification division has helped numerous people stay in their home, even after receiving a notice of default. Others turn to bankruptcy to help them reorganize their financial lives. Many of the clients considering bankruptcy ask if there is a way to simply eliminate the second mortgage on their home. While Chapter 7 is a great way to eliminate qualified unsecured debt, it will not change or eliminate secured debt such as debt secured by a home or car. In some cases, a lender may be willing to negotiate with a debtor in Chapter 7 to modify a home mortgage or car loan. However, these lenders are not required to modify the terms of the loan under Chapter 7 bankruptcy and success under Chapter 7 is inconsistent. However, Chapter 13 may provide a solution.
While Chapter 7 has no power to modify a home mortgage, Chapter 13 can eliminate a second mortgage in certain circumstances. Under a Chapter 13 plan, a debtor can analyze whether the mortgage is secured or unsecured based on the value of the asset. Thus, if the amount of the first mortgage exceeds the value of the asset, the bankruptcy code treats the second mortgage as unsecured. Under Chapter 13, this unsecured mortgage can be stripped from the asset. As a result, the debtor will ]repay the second mortgage the same as other unsecured creditors as it is effectively eliminated. This process is done through an appraisal and motion filed with the court as part of the debtor’s Chapter 13 plan. As long as the value of the asset is clearly worth less than the first lien (i.e. the second mortgage is completely unsecured), then the court has a basis to eliminate the mortgage.
In addition to lien stripping, our office may be able to cram down a loan amount to the property’s actual value. While this is encouraging for many people, there is a major limitation to cram downs under Chapter 13. This section of the bankruptcy code does not apply to liens secured by the debtor’s residence. Thus, this section is most often used for secured property such as cars, or investment real estate (i.e. homes that are not the primary residence). For more information on Chapter 13 plans, lien stripping, and Chapter 7 bankruptcy, visit our Bankruptcy section.
This post was written by Benjamin Yrungaray
Benjamin Yrungaray handles bankruptcy and loan modification cases at First Source Law. He is a member of the state bars of California (#256224), Pennsylvania (#208558), and New Jersey. He is also admitted in the Central District Court of California, Southern District of California, and New Jersey District Court.
This is awesome, it clarified some opposition I had heard.