You can strip one or more totally unsecured mortgages through bankruptcy court. Congress zealously refuses to allow bankruptcy court to modify first mortgage loans, no matter how underwater it may be. Notice I said first mortgage. The bankruptcy court has always (at least as long as I’ve been doing it) had the power to modify second, third and more mortgages. This goes euphemistically as, “stripping” but the real name is avoiding the lien.
The Loans Must Be Totally Underwater
If the loan is totally underwater, it can be stripped off the real estate. That means that the property value is less than the amount due on the first mortgage, including paying arrearages. There can not be a penny of value securing the loan in you r home value. If you want to strip a third mortgage, the property value must be less than the total of the first mortgage, the second mortgage plus arrearages, and so on. The highest number of mortgages I’ve seen a client have is four. Few people understand that a home equity loan or HELOC is a painless term for a second or greater mortgage loan.
Mortgage Strip in Chapter 13 Only
The bankruptcy court only has the power to strip home loan in a chapter 13 case. The stripped loan will be treated as the unsecured debt that it is. To make this happen the grantors must be chapter 13 debtors. That means that everyone in whose name the mortgage is in must be in the chapter 13. If it is a joint loan then both husband and wife must be debtors. It can be a single filer case if the loan is in the name of one spouse or the other. Chapter 7 will only discharge the obligation, but the lien will remain against the property.
Procedure to Strip a Mortgage
Avoiding or stripping a home loan is not something that automatically happens in a chapter 13 case. If the lender files a proof of claim in the case, then you can file a motion to avoid the lien. If there has been no proof of claim then you have to bring an adversary proceeding. This is just the name for a separate lawsuit in bankruptcy court. Like many things in life, there are no guarantees. Proceedings to strip or avoid a mortgage lien require a separate fee agreement from the standard chapter 13 agreement. Billing is hourly plus expenses. Attorney fees are paid through the plan as part your monthly debt reorganization payment.
If it is clear that the mortgage is not supported by any property value whatever, then it is fairly common that the Bank will not reply or object to the motion and it will just be granted. Winning, however, does not take away the mortgage lien on your home. You must complete the plan and receive a discharge. At that point the order of the bankruptcy court can be filed with the county recorder to release the underwater mortgage liens.
Chapter 13 is Your Perfect Solution
If you live in Westlake, Bay Village or Rocky River it is likely that you have a home with pretty decent property value. That was the case for one of my neighbors. He caved in to the temptation and before the crash he borrowed against the house to the hilt. First mortgage, second mortgage, and even a third. The bottom fell out. Does this sound like you? If so, you can save your home with a chapter 13 by stripping the underwater mortgage loans.