One of the most significant benefits available to individuals under present bankruptcy laws is the ability to remove a second mortgage or other junior lien from an individual’s primary residence in cases where there is insufficient equity in the home to secure the second mortgage or other junior lien. Therefore, if you have two mortgages against your home, you can remove the second mortgage if your home is worth less than you owe on the first mortgage. If your home is worth less than you owe on the first mortgage, in reality, there is insufficient value in your home to secure the junior lien holder.
For example, a couple’s home is worth $125,000. The principal balance of the first mortgage against their home is $130,000.00, and they owe $25,000.00 on a second mortgage. This couple could seek to have the second mortgage removed from their home in adversary proceedings in a Chapter 13 bankruptcy case.
Another example is where an individual’s home is worth $125,000, they have a first mortgage of $90,000, a second mortgage of $40,000, and a third mortgage in the amount of $12,000. Since there is insufficient equity in the home to even partially secure the third mortgage, it could be eliminated in adversary proceedings in a Chapter 13 bankruptcy case.
To eliminate a lien against your primary residence in Chapter 13 bankruptcy proceedings, it is necessary for your bankruptcy attorney to initiate legal proceedings (adversary proceedings) within your bankruptcy case against the junior lien holder. The only issue in the litigation against the junior lien holder would be the value of your home. Evidence of your home’s value may consist of appraisals, tax notices, your observations of home sales in your neighborhood and other similar factors. In evaluating whether or not you are eligible to seek removal of a second mortgage (or other junior lien), the property value you should consider is what you actually believe you could sell your home for if you put it on the market. Appraisals obtained for purposes of refinancing are often high.
If individuals are successful in removing second mortgages and other junior liens from their homes, the debt to the junior lienholder will be treated as a general unsecured claim under the individual’s Chapter 13 Plan. This means that if the Debtor is paying 15 cents on the dollar to their unsecured creditors under the terms of a Chapter 13 Plan, they would also be required to pay 15 cents on the dollar on the debt previously secured by a lien on their home. No interest would be paid on this unsecured debt.
Many individuals are unable to retain home ownership because of a second mortgage with large monthly payments they are unable to pay. Removing a lien and eliminating a second mortgage payment enables them to retain their homes. Further, from a practical standpoint, for many individuals it is preferable to surrender their homes and then continue to pay a fully unsecured second or third mortgage. If they can remove the second or third mortgages from their home, payment of the first mortgage is generally consistent with what the home is worth.
NO INFORMATION CONTAINED HEREIN IS INTENDED TO CONSTITUTE LEGAL ADVICE, AND IS NOT APPLICABLE TO ANY SPECIFIC SET OF FACTS, ESPECIALLY AS TO ANY INDIVIDUAL’S PERSONAL SITUATION. THE INFORMATION CONTAINED HEREIN NOR THE PERUSAL OF IT DOES NOT ESTABLISH NOR CONSTITUTE AN ATTORNEY-CLIENT RELATIONSHIP WITH HUNTSMAN LOFGREN & ASSOC. OR ANY OF ITS ATTORNEYS. THE INFORMATION SET FORTH ABOVE IS BASED ON NEW BANKRUPTCY LAWS WHICH BECAME EFFECTIVE OCTOBER 17, 2005 KNOWN AS THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005 (BAPCPA). BECAUSE OF THE COMPLEXITY OF THE NEW LAWS, PLEASE REFER TO THE ACTUAL BANKRUPTCY CODE AND RULES AND/OR CONSULT WITH A BANKRUPTCY PROFESSIONAL TO EVALUATE THE APPLICATION OF THE ABOVE INFORMATION TO YOUR SPECIFIC SITUATION.