If there is no equity in your home after the first mortgage, you may be able to “Strip” a second mortgage lien and treat just like any other unsecured lien like a credit card and pay little or nothing on that debt.
Back in the hey-day of toxic mortgage lending 2005, 2006, and 2007, it was all-to-common to sell a homeowner two loans at once: a first mortgage loan and a second mortgage loan. Often, when combined, the total value of the loans was as much as or sometimes even greater than the value of the purchase price of the home. Of course today, those home values are not at all what they used to be and the homeowner is stuck with a pair of loans that exceeds the value of the home and may for many years to come.
The Second Mortgage Makes it Harder To Get A Loan Modification.
When in a foreclosure situation, the second loan coupled with the fact that the combined loan value far exceeds the home value, exacerbates the situation and makes it much more difficult to obtain a loan modification. With this excessive debt couple to the property by the liens, lenders are reluctant to offer a loan modification. Lenders view the situation as one where the home owner is just going to default again after a loan modification due to the excessive debt on the property.
Things Change if The Second Mortgage Is Removed.
It becomes more attractive to a lender in making a decision to grant a loan modification if the second loan is eliminated. Both from the point of view of eliminating a lien on the property but also freeing up cash flow for the homeowner and making it easier to pay the first mortgage loan once it is modified.
How Can The Second Mortgage Be eliminated?
In bankruptcy, although we talk about eliminating the second mortgage, what is really going on is that we are converting a secured debt to an unsecured debt. This is known as “stripping” the lien. When a debt is converted to unsecured, it is then treated just like a credit card debt or other unsecured debt and often very little or sometimes nothing is paid to that debt during the course of the chapter 13 repayment plan. When we strip a second mortgage, we remove the lien from the property and convert the loan to unsecured and pay little or nothing on that debt.
The Benefits of Stripping A Second Mortgage Lien.
Once the second lien is stripped, two thing happen: first, the monthly payment that was required to pay the second mortgage loan is now greatly reduced freeing up cash flow to pay the first mortgage which is the priority in saving the home. The other benefit comes when the home is sold, the amount of money that is required to pay-off liens against the property is now reduced which may allow a home owner to sell a home when otherwise, she could not.
Consider the Benefit of Lien Stripping in a Chapter 13.
In considering whether or not to use a chapter 13 bankruptcy as a tool to resolve a foreclosure and obtain a loan modification when there is a second loan involved and the home is underwater as to the first loan, consider the benefits of the lien stripping when making your decisions.
