Shelter From the Storm - Using Chapter 13 Bankruptcy to Save Your Home

July 14, 2011

Saving House from Foreclosure

The collapse of the housing bubble in mid-2006 triggered a mortgage crisis that has severely impacted our nation's economy. Excessive subprime lending during the boom created a vulnerable banking industry. Holders of adjustable-rate mortgages found themselves forced into foreclosure when home values fell and they were unable to refinance their homes. Zero money down and "liar loans" (loans issued by lenders who failed to verify borrower income), weakened banks as homeowners defaulted. Borrowers who had overextended themselves by refinancing during the boom began to surrender their homes to foreclosure.

The swarm of foreclosures ultimately impaired the banks' ability to lend as they watched their financial cushions being blown away. The mortgage foreclosure crisis triggered the Great Recession, causing bank failures, unemployment and staggering national debt.

As the United States strives for recovery, many questions remain. What are the options for "underwater" homeowners who want to save their homes despite owing more on their homes than they are worth?

Lien Stripping of Second Mortgages

Across the country, many homeowners are looking to Chapter 13 bankruptcy as a shelter from the storm. Chapter 13 bankruptcy is a form of bankruptcy that establishes a payment plan to pay either a portion or all of the consumer's debts over a period of typically three to five years. Payments are determined in part by the household budget and in part by what debts may need to be paid throughout the plan.

Chapter 13 bankruptcy is an attractive option for many debtors strapped with debt because it offers more flexibility than the shorter Chapter 7 bankruptcy. Chapter 7 bankruptcy is used to wipe away unsecured debt but does not alter any terms or conditions of secured debts, such as mortgages or car payments.

The most attractive feature of a Chapter 13 bankruptcy that is unavailable to someone filing a Chapter 7 petition is the ability to shed a second mortgage obligation. The process is known as "lien stripping" or "stripping down" the second mortgage. Lien stripping does not affect the validity of the underlying mortgage. Instead, the second mortgage is reclassified as being "unsecured" based on the value of the debtor's home.

In order to qualify for a lien strip, a debtor must meet all of the following criteria:

- The second mortgage must be attached to the debtor's principal residence.

- The second mortgage must be completely unsecured.

- The debtors must be able to afford a monthly Chapter 13 plan payment.

If you are looking for relief from your second mortgage it is important to understand all of your options. Even if you think you may not be able to make a monthly payment because of other debt obligations, you should speak with a knowledgeable bankruptcy lawyer to explore your alternatives. Your attorney can review your situation thoroughly and advise you on whether bankruptcy is an appropriate solution.

Article provided by Scura, Mealy, Wigfield & Heyer, L.L.P.
Visit us at www.scuramealey.com