Can you really get rid of your second mortgage in a Chapter 13 bankruptcy?

Yes, you really can get rid of your second mortgage in a chapter 13 bankruptcy, but it only works when the value of the primary mortgage is equal to or greater than the value of the property securing it.

Yes, you really can get rid of your second mortgage in a Chapter 13 bankruptcy, but it's math, not magic. And like any mathematical equation, it only works if the numbers balance.

How it Works

On your bankruptcy petition, you must include the property value of your home and the amount of debt secured by it. For example, a typical scenario would be a $500,000 home securing a debt of $450,000. In this case, the equity on the home is a positive $50,000.

Now suppose that the $500,000 home has a first mortgage with a remaining balance of $500,000, and also has a second mortgage with a balance of $100,000. In this case, the $100,000 second mortgage is "unsecured." Because your home no longer secures the loan, you can "strip" it off. It then becomes part of your unsecured debt, and is treated like all of your other unsecured debt. Most bankruptcy filers pay only a small portion of their unsecured debt through their repyament plan. 

When Will it Work?

Generally speaking, a Chapter 13 lien strip will only work when the value of the primary mortgage is equal to or greater than the value of the property securing it. When that happens, any other liens against the property are no longer secured by any equity in the property and become unsecured debt. 

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