I received the following question recently: “I live in Woodland Hills and I’ve received notices in the mail saying I can “strip” away my mortgage. Is this true?”
Yes, it is true that in a Chapter 13 bankruptcy case you may be able to “strip” your 2nd mortgage.
The term “lien stripping” refers to a motion that a bankruptcy attorney can draft and file for you. To approve the motion, the bankruptcy court in Woodland Hills will require that the bankruptcy attorney can show that the the lien is “wholly unsecured,” and then that the “wholly unsecured” lien can be removed from the property and treated like unsecured debt.
“Wholly unsecured” refers to when there is not even a dollar of equity in the mortgage. Once the mortgage is “stripped” it will be treated the same as other unsecured debts (like credit cards or personal loans) in the client’s Chapter 13 bankruptcy plan. Many Chapter 13 bankruptcy plans propose to pay very little (or sometimes nothing at all) to unsecured creditors, so once the 2nd mortgage has been “stripped” it will often be paid either nothing or a small portion of what was owed.
Let’s take a hypothetical client named “Jim” who lives in Woodland Hills and wants to know if he can get rid of his 2nd mortgage in bankruptcy.
His house in Woodland Hills is worth approximately $650,000.00. He has a first mortgage with a balance of $685,000.00 and a second mortgage home equity line of credit for $200,000.00. In this scenario, Jim can “strip” the second mortgage because there is zero equity in the second mortgage. To put it another way, in order to strip a second mortgage in bankruptcy, your first mortgage balance must be higher that the market value of your home.
Here’s a second example, this time we’ll use a hypothetical client named “Bill” who also lives in Woodland Hills. Bill’s house is worth $625,000.00. Bill has a first mortgage balance of $600,000.00 and a second mortgage of $100,000.00. Unlike Jim, Bill cannot strip away his second mortgage because there is approximately $25,000.00 of equity in the second mortgage.
The bankruptcy code does not allow for partial stripping of the second mortgage (at least not in the sense we are discussing. There is a procedure for cramming down investment/rental property mortgages but it is almost never used as it would require repayment of the crammed down mortgage within 5 years and that’s usually not feasible).
If you live in Woodland Hills or the surrounding areas and want to know if you may be able to strip away your second mortgage in a bankruptcy, give us a call. Our experienced bankruptcy attorneys are happy to look at your property and mortgages and see if lien stripping is an option for you.