Goodbye Second Mortgage!

June 9, 2008,

Is it really possible to get rid of that second mortgage, but keep the home? Quite possible. Certain things must be in place for this to happen. First, a "strip off" of a second mortgage is not possible in Chapter 7 if the debtors wish to keep the property. In Chapter 7, the only real options are to keep the home and pay the 2nd mortgage, or to surrender the home and then the mortgage as well as any potential deficiency go away.

In Chapter 13, however, it is possible to strip off the second mortgage as long as it is wholly unsecured. What does that mean? Say you have a home worth $335,000. First mortgage loan balance is $300,000, while the second mortgage loan balance is $100,000. This is NOT a wholly unsecured mortgage. This second mortgage is undersecured, as opposed to unsecured, because the second mortgage lender has a security interest of $35,000. While it is less than the balance of the loan, some amount is still secured, and there is nothing that can be done here, even with the help of bankruptcy laws, to get rid of that second mortgage.

On the other hand, if the property is worth $335,000, and the first mortgage loan balance is $350,000, no matter what the balance of the second mortgage loan might be, that second mortgage is now wholly unsecured. There isn't enough value in the property to cover even the first mortgage, let alone any of the second. In this scenario, it is possible to treat the second mortgage loan as wholly unsecured in Chapter 13, and upon successful completion of the Chapter 13 plan and an entry of discharge, an order of the court may be sought that clears the lien of the second mortgage as well.

In the above example, it is clear that the second mortgage is wholly unsecured. In reality, however, not every instance will be as clear. What if the debtors' broker says that the property is worth $335,000, as above, but the mortgage lender got its own broker, and according to their broker, the value of the home is $350,001? If there is even $1 of security for the second mortgage lender, a "strip off" is not possible and the mortgage lien will remain on the property. What happens in these situations? Answer: the judge decides. To do this, the court may need to take evidence from brokers to make a determination of value.

When a second mortgage is stripped, it is treated like other unsecured debts in Chapter 13, meaning, the plan may provide for a repayment of some percentage of the loan, but this could be as low as 5%, or even less. The key to the strip-off is successful completion of the plan.