If you have a second mortgage, a home equity line of credit (aka, “HELOC”), or any sort of junior lien on your home (ex., anything except the 1st mortgage), these loans can be stripped off in your Utah Chapter 13 bankruptcy. This means the loan becomes unsecured and is then discharged (or wiped out) in bankruptcy, leaving you with only your 1st mortgage to pay. While 2nd mortgages and home equity lines are the most common forms of junior liens, any junior lien can be stripped. For example, if you have an SBA loan for your small business which required you to pledge your home as collateral, it can be stripped off in your Utah Chapter 13 bankruptcy.
In order to strip off a junior lien such as a second mortgage or home equity line of credit (“HELOC”), your home must be worth less than the senior liens not being stripped. For example, in order to strip off a second mortgage, the fair market value of your house must be less than what you owe on the primary, or first, mortgage. If that is the case, there is then no equity for the junior lien to “attach to” and the Bankruptcy Court can order it removed, or “Stripped Off.” (This also applies to third liens, if the value of the property is less than the first and second liens combined.)
While you may believe your home is worth more than the amount you owe on your first mortgage, you must consider that the real estate market is extremely depressed right now as a result of the economic and foreclosure crisis. Our experience indicates that nearly everyone believes their home is worth more than it is currently. The first step in this process is getting a realistic valuation of your home in today’s market. The Law Offices of Ryan E. Simpson, P.C. located in West Jordan, Utah can help you do that.
Removing liens is one of the greatest benefits of bankruptcy for homeowners. Eliminating the monthly payment on your second mortgage or HELOC acts as your own Bankruptcy Mortgage Modification. And, unlike the modifications offered through HAMP and similar programs, this one is permanent. The bank can’t change its mind during the trial period or determine after the fact that, oops, we made a mistake, you don’t actually qualify and now you owe us for all the full payments you didn’t make. In bankruptcy you are no longer at the mercy of the banks, the banks are at the mercy of the law.
Lien stripping is not possible in Chapter 7 bankruptcy for consensual liens – judgments are different. Many people have a bad view of Chapter 13 bankruptcy because of misinformation or cases they have heard of that weren’t handled properly. It is the only chapter of consumer bankruptcy that allows you to wipe out a second or third mortgage. It is also the only chapter of consumer bankruptcy that allows you to cure arrears over a long period of time, making it possible to keep your home.
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