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Chapter 13: Getting Rid of Second Mortgage

January 31, 2014

Second Mortgage “Stripping”

by  Steven Taylor

One of the advantages of filing an Indiana bankruptcy under Chapter 13 is that an entirely unsecured second mortgage, or other junior mortgage, can be “stripped” from your homestead or other real estate.  This mortgage is then treated by the Chapter 13 plan as an unsecured claim, the same as a credit card or other unsecured debt.  Consequently, it only has to paid in part rather than being paid in full as for most mortgages.  Upon the completion of the plan, the lender is required to release its lien interest against your property.  In Indiana, “stripping” unsecured second mortgages cannot be done in Chapter 7 cases. lien-strippingThe bankruptcy courts in Indiana allow this avoidance of the lien to occur by motion practice or by confirmation of the Chapter 13 Plan.   Upon objection by the creditor, it is necessary to show that the real estate’s market value is less than the entire balance owed on the liens that have priority over the to be avoided secured lien interest.   This means that in deciding whether to seek to strip off a second mortgage, an appraisal of your home may be necessary.

Second mortgage lien stripping is allowed by bankruptcy code sections 506 and 1322(b).  It requires committing to a three to five year Chapter 13 repayment plan, where the now-unsecured second mortgage is paid based upon your ability to repay it, the same as most of your other debts.

If you are trying to restructure your debt to make sure you can afford to keep the necessities of life, it makes sense for you to obtain a free consulation at our offices to discuss your options.

Last updated 1/31/2014
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