Lien Stripping, Second Mortgages, and Chapter 13 Bankruptcy

If you have a second mortgage and your home has lost value in the recession, lien stripping could help you emerge from bankruptcy with significant home equity.

The recent housing market crash has had a severe effect on home prices in Chula Vista, San Diego, and most of Southern California. In San Diego County, the value of homes and condos has plummeted by an average of 40 to 50 percent over the past five years, leaving many homeowners with underwater mortgages and no home equity. Those with second or third mortgages may be struggling to make payments and wondering whether or not to just walk away from their homes altogether.

While many homeowners may think that there is no way out of their housing predicaments - and certainly no way out that involves keeping their homes or improving their net worth - lien stripping and Chapter 13 bankruptcy could be a viable option that could not only erase second or third mortgages, but also allow homeowners to keep their homes and even increase the amount of equity in their homes.

What is lien stripping? Let's look at a step-by-step example:

• 1. A Chula Vista homeowner has two mortgages: the first mortgage is for $500,000 and the second is for $100,000.
• 2. Since the housing market crash, however, the value of her home has dropped from $500,000 to $300,000. Currently, she is struggling to make the mortgage payments on a home that is no longer worth what she is paying for it.
• 3. The homeowner learns that all of the second mortgage and part of her primary mortgage are technically unsecured loans because lenders are only secured up to the amount of the current value of the property. That is, only $300,000 of the mortgage is secured.
• 4. When the homeowner files for Chapter 13 bankruptcy, the second mortgage will likely be discharged after the conclusion of her payment plan.
• 5. The homeowner emerges from bankruptcy with only one mortgage and with actual home equity for the first time in years. She will be able to stay in her home and will not have to pay the lien even when she sells the home.

Keep in mind that lien stripping requires the homeowner to go through the entire Chapter 13 bankruptcy process, including making all payments in a bankruptcy reorganization plan. In addition, lien stripping requires that the second or third mortgage is completely unsecured in order to be discharged. Finally, lien stripping requires that the homeowner prove that the current market value of his or her property is low enough that the second mortgage has become unsecure.

Lien stripping can be tough to understand, and thus it can be difficult to know if it is the right solution to your particular home mortgage issues. The best way to find out if lien stripping is a viable option for your family is by contacting a Chula Vista bankruptcy attorney today to find out if you could erase one of your mortgage payments. Call Kerry Denton today at (619) 421-1000 to schedule a free Chapter 13 bankruptcy consultation.