When you fall into debt, often, the most nerve-wracking matter is whether or not you can afford to pay your mortgage. If you fall behind on these payments, you may worry about losing your home. As such, you may make the difficult decision to take out a second mortgage on your home. However, if the debt keeps accumulating and bankruptcy is your only option, you may wonder if it’s possible to strip a second mortgage during the bankruptcy process. The following blog explores what you should know about these matters and the importance of connecting with a Memphis, TN Chapter 13 bankruptcy lawyer to explore your legal options.
What Does It Mean to Strip a Second Mortgage?
When you take out a second mortgage, you are essentially placing a lien on the portion of the property you have already paid off. It’s imperative to understand that this is very different than refinancing, which occurs when you reorganize the terms and conditions of an existing debt. Instead, you will be responsible for paying both the primary mortgage and the second mortgage you have taken out. Typically, to be approved for a second mortgage, you’ll need to have equity in your home. This is the portion of your home that you’ve already paid off or built up through home improvement projects to increase the value of your home.
Lein stripping is an option for those utilizing bankruptcy for debt relief. This is an option for those whose first mortgage exceeds the value of the home. For example, if your home is worth $200,000 but your first mortgage is set at $300,000 and your second at $100,000, you may be eligible to eliminate the second mortgage because your first exceeds the value of your home.
What Chapter Must I File for This Option?
If you carry a second mortgage and want to eliminate it through bankruptcy, you must file Chapter 13. This is because a 2015 Supreme Court decision ruled that a second mortgage cannot be stripped during Chapter 7, as this is a liquidation process. Because a lien on real estate is considered an asset, trying to navigate Chapter 7, which is designed to sell assets, would be much too complicated.
As such, if you are carrying a second mortgage you wish to eliminate, you must pursue Chapter 13 bankruptcy. This is a process in which you will be placed on a three to five-year repayment plan to repay your creditors and catch up on debts. At the end of your case, your remaining eligible debts will be forgiven.
Navigating bankruptcy can be an incredibly difficult and complicated process. That is why it is critical to connect with an experienced attorney with the Arnold Law Firm to explore your legal options. We understand how difficult these matters can be, which is why we will do everything in our power to assist you. Connect with our firm today to learn more.
