As the economy and housing market has declined many Americans have found that their house is worth much less than they owe on it. This can be discouraging if you are struggling to make your mortgage payments or considering filing for bankruptcy. Fortunately, there is an old technique known as “lien stripping” or “mortgage stripping” that can help you eliminate a second mortgage during bankruptcy.
Usually a lien on your property will need to be paid off before the property can be legally sold. If you fail to pay the lien the creditor could have the right to sell your property if the debt is not repaid. Many people have liens on their property and don’t even realize it. Usually an improvement done to the property, such as adding a new A/C unit or an addition to a house, will result in a mechanic’s lien being placed on your property to ensure that you pay back your loan. Liens that you should be aware of are second mortgages or a home equity line of credit.
There are two main factors to consider when determining your eligibility for lien stripping. First, you must be filing for a Chapter 13 bankruptcy. This kind of bankruptcy generally offers you the most protection and you will continue to pay off your secured debts in a reorganized payment plan.
The next deciding factor is that your first mortgage balance must exceed the market value of your house today. Say you purchased your home at $300,000 in 2005 and your first mortgage is in the amount of $200,000. Your second mortgage is currently at $50,000 and the value of your home has dropped to $150,000. In this case the bankruptcy judge could “strip away” the second mortgage because by definition, the first mortgage will always be paid off first.
If you attempted to sell your house today at $150,000 then your first mortgage wouldn’t be paid in full and your second mortgage wouldn’t be covered at all. There isn’t enough equity to satisfy the debts. The value of your house is very important because the second lender is essentially unsecured if the first mortgage cannot be paid. If you’ve done your homework, you will know that unsecured debt can be discharged in a Chapter 13.
While lien stripping can provide a bit of breathing room for the debtor, it is likely that mortgage companies will mount challenges to this process in the future. These companies can lose thousands of dollars if a debtor files for bankruptcy. If you are filing for bankruptcy and would like to know more about lien stripping please contact a Rio Grand Valley bankruptcy lawyer for more detailed information.
Jeff Davis is the Owner of the Davis law firm, and a highly experienced Harlingen, McAllen, and Edinburg bankruptcy attorney. To find out more information about a Rio Grand Valley bankruptcy lawyer, please visit www.jeffdavislawfirm.com.