2nd Mortgage Lien Strip

• What is 2nd Mortgage Lien Strip?
• 2nd Mortgage Lien Strip FAQ
• 2nd Mortgage Lien Stripping Video
• 2nd Mortgage Lien Strip Fees
• Why Wadhwani & Shanfeld for 2nd Mortgage Lien Strip?

What is a 2nd Mortgage Lien Strip?

If you used the rise in housing prices from the late 1990s to the mid 2000s to cash out the equity in your home, you may have a 2nd mortgage or a home equity line of credit on your home. Since that time, property values have fallen considerably, and you may owe more on your home than it is worth. You may even owe more on your 1st mortgage alone than your home is worth.

If that is the case, Chapter 13 bankruptcy provides an invaluable tool for bringing the value of the home and the amount owed on it more in line with each other. It’s called a 2nd Mortgage Lien Strip, and it can be used to fully extinguish a 2nd mortgage where you owe more on the 1st mortgage than your home is worth.

To understand how a 2nd mortgage lien strip works, you must first understand a little about Chapter 13 bankruptcy.

In Chapter 13 bankruptcy, you create a repayment plan that diverts your disposable income to your unsecured creditors. Depending on how much disposable income you have, your unsecured creditors will be repaid anywhere from 0% – 100%. Secured creditors, on the other hand, are fully repaid in a Chapter 13 case, unless you choose to relinquish the property that secures the debt. As you can see, you want as much of your debt as possible to be unsecured because unsecured creditors will likely be paid back much less than they are owed.

At this point, your 2nd mortgage is considered secured because when you took it out, your house’s value was high enough to provide a security interest to your 2nd mortgageholder – otherwise that lender would not have made the loan to you. As a secured creditor, your 2nd mortgageholder would ordinarily be entitled to full repayment in a Chapter 13 plan, assuming such a plan would ever be feasible.

However, since property values have fallen, your house might be worth less than you even owe on your 1st mortgage. If this is the case, your house might not provide security for a 2nd mortgage, since there would be nothing left over for it after a foreclosure. Thus, your 2nd mortgageholder has gone from a secured creditor to an unsecured creditor, but you must get the court to legally recognize this change.

There is a process in Chapter 13 called a 2nd mortgage lien strip, which gets this status change officially recognized. The effect is that your 2nd mortgage becomes an unsecured debt, which is paid (likely only partially) like your credit cards. Any remaining balance will be discharged after successful completion of your Chapter 13 case.

A 2nd mortgage lien strip can get rid of debt and lower your monthly house payments, and therefore it can go a long way toward creating a sustainable plan for saving your home.

2nd Mortgage Lien Strip FAQ

Q: Will a 2nd mortgage lien strip help lower my 1st mortgage?

A: Unfortunately, nothing can be done in bankruptcy to alter your payment amount on your 1st mortgage. However, a successful 2nd mortgage lien strip in a Chapter 13 bankruptcy case can lower your total monthly mortgage payment by however much you pay per month on your 2nd mortgage. If you can afford your 1st mortgage, a 2nd mortgage lien strip can play a critical role in creating a sustainable plan for staying in your home.

Q: Can I do a 2nd mortgage lien strip in Chapter 7?

A: Under the current state of the law, a 2nd mortgage lien strip is only permitted in a Chapter 13 bankruptcy case, not in a Chapter 7 bankruptcy case. The reason for this boils down to the language of the separate chapters of the U.S. Bankruptcy Code. The language in Chapter 7 expressly prohibits modifying the rights of creditors in a debtor’s bankruptcy case. Chapter 13, on the other hand, contains no such express prohibition, and thus courts have devised the 2nd mortgage lien strip in an effort to give relief to struggling debtor-homeowners.

However, if you are a good candidate for Chapter 7 bankruptcy but want to retain your home and strip off your 2nd mortgage, we can likely propose a Chapter 13 plan that combines the benefits of a Chapter 7 (discharge of all of your unsecured debt) and Chapter 13 (2nd mortgage lien strip).

Q: Am I eligible?

A: To be eligible for a 2nd mortgage lien strip, you must have a 2nd mortgage or home equity line of credit that is subordinated to a 1st mortgage.

If you have such a subordinated mortgage, you must owe more on your 1st mortgage that your house is worth. If this is the case, the 2nd mortgage will be wholly unsecured, and thus have no right to retain its status as secured.

Finally, you must be a good candidate for a successful Chapter 13 plan. You must want to hold on to your home, and further you must be able to continue paying for your home, at least in the amount due on the 1st mortgage. If you are unable to continue paying for your 1st mortgage, your Chapter 13 plan will not successfully protect your home from foreclosure.

Q: What is the process?

A: The first step is to file your Chapter 13 case. Once we get that filed, we will then begin preparing for your 2nd mortgage lien strip by taking one of two possible courses of actions, depending on the requirements of the judge in your case. The first and most common is called a Lien Avoidance Motion (LAM). This is a motion that we file to demonstrate to the court that your house is worth less than you owe on the 1st, thus leaving the 2nd mortgage without its security interest. Often, a well-prepared LAM may not even be opposed by your 2nd mortgageholder.

If the judge in your case does not allow LAMs, then an Adversary Proceeding will have to be filed, which is essentially a trial that occurs within your case. These are more involved and time-consuming. However, as with LAMs, a well-prepared adversary proceeding complaint will often not even be opposed by your 2nd mortgageholder.

2nd Mortgage Lien Stripping Video

2nd Mortgage Lien Strip Fees

The fee for a 2nd mortgage lien strip will first depend on whether your case requires a lien avoidance motion or an adversary proceeding; as the adversary proceeding requires more work, it will cost a little more. Our fees, though, are very competitive. Feel free to call our office to learn more and get a quote for your case.

Why Wadhwani & Shanfeld for 2nd Mortgage Lien Strip?

Our firm handles a lot of Chapter 13 cases, and we are very experienced in Chapter 13 cases that have a 2nd mortgage lien strip component. In fact, we do a lien strip in the majority of our Chapter 13 cases.

A lot of inexperienced bankruptcy attorneys will not even take on a Chapter 13 case, let alone one that involves a 2nd mortgage lien strip. This is because it is far more involved than your basic Chapter 7 case. Thus, experience is crucial.

If you would like to see if you are a good candidate for a 2nd mortgage lien strip, please give our office a call for a free consultation to learn more and get your questions answered.