Discharging the “Underwater” 2nd Mortgage or Equity Line of Credit on You Home
NOTE: Before I explain this strategy you should first discuss this possibility with a lawyer who fully understands “motions to value property” and there application in a Chapter 13 bankruptcy case as this technique requires a complex analysis, documentation and knowledgeable representation. This DOES NOT apply in Chapter 7 cases.
OK, here is the secret. You can “get rid” of your second mortgage when you file a chapter 13.
First you must qualify for a Chapter 13 – in other words you must be able to make your regularly monthly payments for all other expenses, including your FIRST MORTGAGE – this strategy does not apply to FIRST MORTGAGE. This is often not a problem for those trying to hold on to their houses, but who are having trouble making the 2nd mortgage payment or the equity line of credit.
Secondly, the second or (subordinate loan) must be wholly unsecured.
That means that after subtracting the value of the first mortgage from the current market value of the house, the second mortgage is “unsecured.”
For example if your house is worth $200,000 at current market rates (start with the opinion of your local real estate agent – get the opinion in writing – a simple letter that states what the house could sell for “today”) and if you owe $250,000 on your 1st Mortgage and anther $75,000.00 on the 2nd Mortgage or “equity line of credit” – than the 2nd is “underwater” or unsecured.
Under these circumstances, the 2nd Mortgage is now considered an “unsecured loan” and in a Chapter 13 repayment plan that unsecured debt would be repaid as an unsecured debt based upon the individual plan’s repayment percentage of the unsecured debt. The plan’s percentage rate is the percentage amount you repay (if any) to your unsecured creditors – the repayment amount is based upon a calculation of income, household size, expenses and application of the means test.
So, if under your court approved Chapter 13 plan you are repaying your unsecured creditors (credit cards, medical bills) at a small percentage of the total amount you owe – say for example 20% you will only repay $15,000.00 of the above mention hypothetical second mortgage (20% of 75,000.00 = $15,000) This portion of the debt repayment in the Chapter 13 plan would be paid out in equal monthly installments of $250.00 per month over a 5 year plan (this doesn’t include the other unsecured debt, trustee fees or interest (if included)).
To qualify for this strategy you must file a Chapter 13 (not available in Chapter 7) and there is a relatively complex analysis to determine if this fits your individual situation (and whether its ultimately beneficial), but I have seen were the 2nd Mortgage company was paid very little if anything through the Chapter 13 plan (this is what referred to as a “zero percent” plan).
This is an exciting possibility for those desiring to keep their home – especially in a down real estate market, but with all good things it requires work to determine if its feasible in your situation.
There is no slap dash answer to discharging secured mortgage debt. If it works – great, if not, you’ve lost nothing. This strategy usually requires an attorney and does not work in all situations, but it never hurts to ask.
Disclaimer
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