The decline in real estate values over the past several years has left many homeowners owing more than their properties are worth. Second mortgages obtained years ago, based on inflated home equity, are now presenting a financial burden. Homeowners facing foreclosure or considering a future home sale may find a Chapter 13 bankruptcy to be a financial option.

As long as real estate prices were rising, second mortgages were a practical method to convert home equity to cash. It is now difficult to sell an affected property for a sales price high enough to pay off all the mortgages. At some point, you have to make a decision about how to proceed in resolving the situation. If you are behind on mortgage payments, filing a Chapter 13 bankruptcy is an alternative to foreclosure. The current market value of your home is used as the basis for reducing or stripping away secondary mortgage claims. The effectiveness of secondary lien stripping is dependent on whether or not you currently have any first mortgage equity.

Secondary mortgage lien scenarios

If you have no equity, the second lien is removed and the balance becomes unsecured debt. At that point, the second loan has the same status as credit card debt or medical debt. A repayment of a portion of unsecured debt may be required, depending on your income and other assets. The following scenario would result in complete secondary lien stripping:

• Appraised home value  $150,000
• First mortgage             $155,000
• Second mortgage         $25,000

A secondary lien cannot be partially reduced. If a current appraisal indicates that there is any amount of equity, the entire second lien remains intact. The following scenario would not result in lien stripping:

• Appraised value           $150,000
• First mortgage             $145,000
• Second mortgage         $25,000

Alternative to a short sale

Lien stripping in a Chapter 13 bankruptcy is also an alternative to a short sale. In a short sale, you must receive mutual agreements from all mortgage holders to voluntarily reduce the amount of their loan balances. The agreements to reduce the  balances are then  reflected in a realistic sales price for your property. Short sales are difficult to arrange, and a Chapter 13 bankruptcy would not require lender approval.

After the Chapter 13 repayment schedule is complete, the second mortgage no longer exists. You are then in a better position to sell your property if so desired. Contact an experienced professional, like Travis A. Gagnier, for further assistance.