Stripping a Second Mortgage in Chapter 13 is well-settled law–Are you eligible?1>
One of the most exciting things I can do for some of 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).
What does Mortgage stripping mean?
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 that existed in recent years in Georgia can actually help you reduce debt. But yes, it also means that as real estate prices continue to recover that creditors may challenge our valuation.
You and 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. But the payoff is high, and when we are reasonably sure that your home is a candidate for stripping the 2nd in Chapter 13, the outcome is fairly certain.
June 1, 2015–Stripping a Second Mortgage in Chapter 7 has just been struck down by the Supreme Court
On June 1, 2015 the Supreme Court issued its widely-anticipated decision in Caulkett that ended stripping 2nd mortgages in Chapter 7 for good.