By far, one of the biggest advantages of filing for Chapter 13 Bankruptcy is being able to remove second and third mortgages from your home. In certain circumstances, a debtor under a Chapter 13 Bankruptcy can request the court to void a lien on the debtor’s residential property.
What are the requirements?
11 U.S.C. §1322(b)(2) gives a person the ability to modify the rights of certain secured claims if they are “wholly unsecured”. Case law has pretty much solidified that if a lien is partially secured by property, its rights cannot be modified, but if the lien is “wholly unsecured” meaning the value of the property is less than security interest of the lien, then the lien is wholly unsecured.
Here is an example:
If your home is worth $100,000 and you have a first mortgage balance of $95,000 and a second mortgage balance of $10,000, the Court would not be able to void the second mortgage because it is not “wholly unsecured”. $5,000 of the second mortgage is secured by the total value of the property.
If your home was valued at $90,000 and the you owed $95,000 on your first mortgage and $10,000 on your second, the second mortgage is wholly unsecured. No portion of the value of your home secured the second mortgage. It can be ‘stripped,’ or completely removed from your property. Once your bankruptcy is complete- the lien will be gone and you will have no obligation to repay it.
Note that regardless of either example, the first mortgage is at least partially secured by the property. It would be impossible to strip a first mortgage unless the value of the property was $0.00, but more than likely, even the land alone would be worth more than that.
If your home is underwater and if you have a second mortgage- Chapter 13 can be a great tool for you to get the fresh start that you have been looking for.