Explained by a Kansas City Bankruptcy Attorney
In the early 2000s, many homeowners took advantage of low interest rates and increased value in their home by taking out a second mortgage on their residence. The homeowners used the funds in the second mortgage to do household improvements, make long-needed purchases, or to simply pay down some other debt. However, after the housing bubble burst, these same homeowners now find themselves with a first and second mortgage that, combined, have a larger balance than the value of their home. Through a Chapter 13 bankruptcy, homeowners can get significant relief.
The Bankruptcy Code allows for a debtor to file a lawsuit within the bankruptcy asking the Court to modify the rights of the second mortgage. The Code states that a second mortgage is only secured against the property if the value of the property is more than the first mortgage. For example, if a debtor has a home worth $100,000, and has two mortgages, the first for $110,000 and the second for $35,000, then the second mortgage is not secured. The Bankruptcy Code allows a debtor to “strip” the second mortgage from the house and turn it into unsecured debt. If successful, the second mortgage could be discharged along with all other unsecured debt such as credit cards and medical bills.
The most important piece of information a debtor must have before he or she attempts to strip a second mortgage is a recent appraisal of the value of his or her home. Home values have dropped significantly over the past two years and most homeowners are unaware of the true value of their home. Before a bankruptcy lawyer can strip a second (or even a third) mortgage, the client needs to get his or her home appraised. If the value of the home is less than the amount of the debtor’s first mortgage, any subsequent mortgage can be stripped and transformed into an unsecured debt. A Complaint to strip a mortgage can be filed simultaneously with a Chapter 13 Bankruptcy and can relieve the client from having to pay his or her 2nd mortgage from that time forward. Contact a Kansas City bankruptcy lawyer at The Sader Law Firm today to discuss the possibility of stripping your 2nd mortgage and restoring value to your home.