If your house is underwater on the first mortgage and on top of that you have a second mortgage, wouldn’t it be nice if you could get rid of the second? As of now, there is a process in a Chapter 13 Bankruptcy called lien stripping that allows this to occur.
Chapter 13 is akin to reorganization for an individual debtor. We use Chapter 13 for three primary functions – (1) to stop a pending foreclosure by filing the case just prior to the sale; (2) to lien strip out second mortgages when the FMV of the house is less than the first mortgage; and (3) to resolve unsecured debt by paying a small fraction of the debt over a 36 to 60 month period.
Chapter 7, on the other hand, allows you to discharge virtually all of your debts right away and does not require payments over the 36 to 60 month period. When it comes to getting rid of unsecured debt – such as credit cards, medical bills and sometimes income taxes, Chapter 7 is the best option if you meet the qualifications. Until now, however, Chapter 7 did not allow the chance to lien strip a second mortgage.
On Tuesday of this week (March 24th) the case of Bank of America v Caulkett was argued in the Supreme Court. At issue in this case, is whether under Chapter 7 (not Chapter 13) a second mortgage lien is extinguished if the value of the home is less than the first mortgage.
If the good ole bank loses, this will be a game changer for people who otherwise qualify for a Chapter 7 case and have a second mortgage on a home underwater from the first. From my perspective – I’m hopeful.
Many homes have seen some bounce back from being underwater, but have not increased to the point where any equity attaches to the second mortgage. The second lien in this circumstance complicates the problem of making it economically smart to remain in the home – something that is usually desired by the homeowner and better for the economy.
Just so you know, we have strategies to use Chapter 7 right now to discharge the mortgage debt – and then negotiate the release of the lien – but a little help from the Supreme Court would be welcomed.
The decision is expected this June.
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