To remove a second mortgage, we must prove that your property is worth less money than what you owe on your first mortgage. This means the property is “under water.” If you successfully complete your Chapter 13 plan payments, we may be able to cancel the second mortgage and you will never have to pay it again. We call this “lien stripping.” Your Chapter 13 plan must say that you want to try to do this. You must tell your second mortgage holder you want to do so in formal Court documents your attorney prepares and files for you.
When you file a Chapter 7 bankruptcy, the bankruptcy removes the personal obligation to pay. It does not cancel or discharge mortgages. Chapter 13 cases are very different.
The mortgage lender may only sue against the property by foreclosure once your bankruptcy case is over or a Bankruptcy Judge gives them permission to do so. This permission cannot be obtained if you have brought the mortgage current or obtained a successful mortgage modification.
A Chapter 7 will not cancel a mortgage. A Chapter 13 may cancel a mortgage if it is a second or third mortgage and the property is worth less than what you owe on your first mortgage.
In order to lien strip, we must file a motion with the Bankruptcy Court. This is usually part of your Chapter 13 plan. If your Chapter 13 plan is confirmed (approved by the Bankruptcy Judge), the Bankruptcy Judge will condition the removal of the second mortgage on your successful completion of the Chapter 13 plan.
Remember that the holder of the second mortgage has the right to object to your plan.
Once you have made all of your Chapter 13 plan payments, the Chapter 13 Trustee will send your attorney and you a “payments complete” letter. This is our signal to file a motion with the Bankruptcy Court to obtain an Order to cancel your second mortgage with the County Clerk's Office. Once we have the order and have it recorded with the County Clerk (such as the Clerk's Office in Flemington, New Jersey), there is no longer a second mortgage on your home should you want to sell your home and only pay off the first mortgage. If you want to keep your home, continue to make payments on the first mortgage until that mortgage is paid off in full years later.
Even after your case is closed, we can still file this motion if for some reason it has not been done already.