Imagine being a homeowner with a first and second mortgage on a property and having the ability to cancel out the second mortgage. Literally stop making payments and keep the property!
That is exactly what is available to debtors who file for Chapter 13 bankruptcy (it can also be used in a Chapter 7). As was written about yesterday in The Mercury News of San Jose, it is becoming an increasingly common occurrence. I am finding it increasingly of use for my clients in both Missouri and Kansas. The situations in which this can work are as follows:
- A debtor must own a piece of real estate, regardless of whether it is a home or investment property, with more than one mortgage in place;
- The value of the property in today’s market must be less than the amount needed to pay off just the first mortgage;
- Either a motion or adversary proceeding must be filed within the bankruptcy case to determine that the second mortgage is wholly unsecured and therefore is to be treated as an unsecured debt.
In evaluating whether this is available to a particular debtor, it is highly recommended that a written appraisal of the property be obtained, from a reputable source, as of the filing date of the bankruptcy. Efforts need to be made to let the appraiser know that you want the valuation to reflect current market conditions as the lower the value – the better for the debtor. Too often appraisers are asked to value a property for what it could sell for in the best of circumstances . . . in this situation, a current market conditions value is all that is needed.
If it appears clear that the value of the property is substantially less than the payoff of the first mortgage, there is little doubt that avoiding the lien and having it determined to be unsecured can greatly help a debtor by: lowering monthly payments, allowing the debtor to use the funds for other necessities, increase the chances of the debtor remaining owner of the property and ultimately, helping the debtor succeed in Chapter 13.
Neil Sader and The Sader Law Firm have more than 30 years of combined experience in Chapter 7 bankruptcy and Chapter 13 bankruptcy cases and can help provide you with the financial freedom you deserve. Contact Neil Sader today for a free consultation at (816) 281-6349 to learn more about the options available to you.