One of the most exciting things I can do for my chapter 13 bankruptcy clients is to ‘strip’ their second mortgages and/or home equity lines of credit (HELOCs). This process is commonly called mortgage stripping (the technical term is avoiding the lien).
Mortgage stripping simply means that we remove the security interest that locks debt to your property and reclassify the debt as unsecured. The security interest is removed upon completion of the Chapter 13 plan because the second mortgage or HELOC is not secured by the value of the property. If you have house that is worth less than the amount secured by your first mortgage, we may be able to mortgage strip as part of your bankruptcy case. [Yes, this means that the abysmal state of our real estate market in Georgia can actually help you reduce debt! ]
I will determine if your property is a candidate for mortgage stripping in Chapter 13 bankruptcy. If it is, I will file suit against your junior lenders in the bankruptcy court as part of your Chapter 13 case. If we prevail in the suit, here’s what happens: during the time your Chapter 13 bankruptcy case, you stop paying the 2nd mortgage, and instead you pay it into the Chapter 13 plan. The money is distributed along with the rest of your Chapter 13 plan payment to all unsecured creditors. Once you complete the Chapter 13 plan, the mortgage strip is effectuated by the court’s discharge of your case. The remaining debt you owed to the junior lender at the start of the bankruptcy case is discharged. You are then obligated to pay only your first mortgage.
Determining whether you can mortgage strip by filing Chapter 13 bankruptcy is a fact intensive calculation. Many bankruptcy attorneys in Atlanta have never done this, and will never do it. Some are familiar with it, but are intimidated by the work involved. These attorneys are failing to use the bankruptcy code to their clients’ advantage.
I live to do this type of advocacy for my clients. I consider mortgage stripping to be the most effective type of loan modification consumers have going. (Certainly more effective than the crap loan mods being offered by most banks these days.)
Caution: watch out for attorneys who represent that stripping junior liens can be done in Chapter 7. Whether or not a junior mortgage can be stripped in Chapter 7 has NOT been decided in the 11th circuit. It is prohibited in many other circuits–I expect it to be prohibited in our circuit when a case comes up. If you’ve talked to an attorney who represents that he or she can win on procedure (as opposed to the merits), be very wary of his or her advice or you may find yourself at the short end of a very punishing stick.
