Homeowners Are Able To Stop Foreclosure And Strip Down Mortgage Debt

With home prices at record lows and foreclosures at record highs, many homeowners know that their home is worth substantially less than what is owed on their mortgage. While many have made the difficult decision to walk away from their properties, there are many homeowners using chapter 13 bankruptcies to bypass a foreclosure.

There are two areas where homeowners can use a chapter 13 bankruptcy filing to remain in their homes;

1. One, when they are behind on payments and need time to get caught up, and

2. Two, to remove a second mortgage or home equity line of credit from their home.

You cannot eliminate any of the debt from a first mortgage, but second mortgages are treated differently. They can be declared unsecured debt when there is no equity to cover them, as is the case for millions of houses that are now worth far less than a few years ago.

By filing a Chapter 13 bankruptcy, your second mortgage can be stripped off your home and treated as unsecured debt; however, this can only be applied to remove a second mortgage off your home if the value of the property is at or below the outstanding balance on your first mortgage.

• For example, if your home is worth $300,000 and there are two outstanding mortgages, in the amounts of $400,000 (for the 1st mortgage) and $75,000 (for the 2nd mortgage), then a Chapter 13 bankruptcy unsecured debt can be applied. In this scenario your home value of $300,000 would be below the first mortgage, which would allow you to strip off the second mortgage. So your second mortgage of $75,000 is completely unsecured debt.

When that happens in a personal bankruptcy proceeding, the second mortgage is put on hold and no payments are required while the homeowner completes a repayment plan for other debts --which typically takes three to five years. After the repayment plan is complete, the second mortgage is eliminated.

Many of these second mortgages were granted during the housing boil, when home prices were going in one direction – boiling up, up and up. It’s simply a fact that a majority of those loans shouldn't have been made at all, and as a result, homes are “upside down”.

This bankruptcy law is not new at all; this law has been used for years; it’s just never been utilized as much because in the past there usually was enough equity in the home to cover the second mortgage.

Of course mortgage bankers don't like the practice, especially since more and more homeowners are finding this practice a viable plan to save their homes from foreclosure, pay less per month and strip thousands of dollars away from their debt.

Bottom Line is – time is always of the essence and there are no longer enough excuses for allowing your dream to be taken away from you.