Discharging Second Mortgages in Chapter 13 Bankruptcy

If you are one of the many Long Island homeowners who purchased your primary residence with 80/20 mortgages, or if you took out a second mortgage in the past few years, did you know that you may be able to remove the second mortgage lien from your home in a Chapter 13 Bankruptcy?

Chapter 13 Bankruptcy offers an important, and often unknown and over-looked, option to consumers who have second and/or, perhaps third, residential real estate mortgage liens on their primary residences – namely, that of removing those junior liens from your home.

Here is the concept. If the current fair market value of your home (as determined by an appraisal prepared by a licensed real estate appraiser) is below the present outstanding balance on your first mortgage (including arrears, if applicable), the second mortgage lien can be “stripped”, and the debt associated with it can be reclassified as a unsecured debt (such as credit card debt, etc). This is also referred to as a “Cramdown” or “Lien Stripping.”

The stripping/cramdown provisions in the Bankruptcy Code affecting second mortgage liens have been available to Long Island New York homeowners in Chapter 13 bankruptcy since 1994. This should not be confused with the bill proposed in early 2009 in Congress which sought to allow Bankruptcy Judges to modify mortgage liens (which was not passed). That bill sought to expand the provisions that have been applicable to second mortgages to first mortgages. Even if you have already modified your first mortgage directly with your lender, or are in a trial modification on your first mortgage, this relief may be available to you.

In most Chapter 13 Bankruptcy cases, only a small portion of this type of debt is paid over a 3 to 5 year period. Immediately upon the successful completion of your Chapter 13 payment plan, the second (junior) mortgage lien shall be permanently removed from your property by Order of the Bankruptcy Court. Please be aware, though, that in order to qualify for this benefit, you must meet the usual and customary qualifications for Chapter 13 bankruptcy.