Can I really strip second and third mortgages from my home?
Chapter 13 can get rid of mortgages.
One of the single most attractive reasons to file Chapter 13 is to remove second mortgages from your home. The tool is available if the home is your primary residence.
If your home qualifies, we know the process to obtain an order from the court that allows you to complete a Chapter 13 plan and emerge with only one mortgage on your home.
For many people, this means they can finally get their home out from “underwater” and begin growing equity again.
A second or third mortgage can only be stripped, it if is “wholly unsecured.” This means that your home has dropped in value to the point that there is no value left for the mortgage to attach to. Here’s how it works.
Let’s say your home is worth $215,000. You got this number from the most recent county tax assessment. If you have a first mortgage with Bank of American for $190,000 and a second mortgage with Capital One for $50,000, then you probably can’t look at stripping the Capital One debt. This is because there is $25,000 in equity beyond the first mortgage that the second mortgage can attach to.
However, if your home has an assessed value of $180,000, then the Capital One debt has no equity to attach to and is “wholly unsecured.” Thus it can be stripped.
When the numbers are close then it is worth getting a formal appraisal. For example, if the county assessment is $200,000, leaving $10,000 in equity for the Capital One debt to attach to, then you may be discouraged. However, in these cases, we will encourage a formal appraisal in case the true value could be determined to be lower than the $190,000 owed to Bank of America. If the appraisal comes in only slightly lower than $190,000, we believe it is worth a shot at stripping the Capital One debt in a Chapter 13. Often, the second note holder, Capital One in this case, will not contest the action and if they do, they may not get an appraisal above the amount owed on the first mortgage. If that happens, your second mortgage will be stripped and you will have saved $50,000.
Finally, it is important to note, that the current law requires that you complete your Chapter 13 plan and make each payment, before the second mortgage is actually stripped from the home. However, during the plan, you will NOT be making payments to Capital One. So if you complete the plan, they will have received nothing more than what you had paid up to the date you filed the case.
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