If you’ve been reading about Chapter 13 bankruptcy, you know that only Chapter 13 allows you to “strip” your second mortgage. “Strip” is an unfortunate term that lawyers and judges use. In fact, the second mortgage doesn’t just go away. It will be converted into unsecured debt of which you will have to pay a certain portion during the course of your three to five year Chapter 13 plan. Besides being able to strip a second mortgage, debtors can also strip any third or more junior mortgages.
Stripping isn’t automatically allowed, though. Here’s how we calculate whether or not you can strip a second or junior mortgage: if the total debt owed to all senior mortgage and lien holders on the home at the time of the bankruptcy filing is equal to or exceeds the current market value of the home, any junior liens can be treated as wholly unsecured. You will likely need to hire someone to complete a current market analysis on your home before you file to see if stripping is even viable.
The total debt owed on senior mortgages should be all amounts that would be owed under the mortgage documents to pay off the loan on the day your attorney files your petition. The total would include prepetition foreclosure expenses and attorney fees, as well as perhaps prepayment penalties. The best course of action is to request a payoff amount from the lender.
Mortgage stripping is just one of the benefits of Chapter 13 bankruptcy over Chapter 7 and should be thoroughly discussed with your attorney. If the second mortgage is small, it might not make sense to choose Chapter 13, as long as there are no other factors compelling Chapter 13.
