My clients are often surprised to learn that the Chapter 13 bankruptcy laws may be used to remove a second or third mortgage from their homes. The process is called “lien stripping,” “cramming down,” or “lien avoidance.”
Many homes are worth less money than is owed on first or second mortgages. In many cases we see in my bankruptcy law practice, the homeowners owe the first mortgage lender or bank more than the house is worth. When there is a second mortgage or Home Equity Line of Credit (HELOC) also secured by a mortgage on the home, the second mortgage may not have any value. This means that if the home were sold, the second mortgage lender would not be paid back any money. It also means that if there were a foreclosure by the first mortgage lender, the second mortgage lender, judgment holders and HELOC lenders would not be paid any money at the foreclosure sale unless there was money left over after the first mortgage lender was paid in full.
For many years in my law practice, I have been filing Chapter 13 cases to remove or cancel second mortgages or HELOC's secured by mortgages on our clients' homes. This is very valuable for people who want to keep their homes but cannot afford to pay their second mortgage and are able to fund a Chapter 13 Bankruptcy Plan. It means that if the Bankruptcy Court agrees and issues a court order allowing it after the payments in a bankruptcy case end, our clients may be able to file documents cancelling the second or third mortgages with the County Clerk's Office.
The result is that the second mortgage, mortgage secured by a HELOC or a money judgment would not need to be paid off after a Chapter 13 Plan is completed. The mortgage is removed from the public record and the home is no longer collateral for the debt. If the clients sell the home in the future, they do not have to pay off the second or third mortgage. This is because the mortgage is considered to have been satisfied by the Bankruptcy Judge's order.
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