Many Bay Area Homeowners Can Strip Off a Second Mortgage in Chapter 13 Bankruptcy

Strip Off Second Mortgage in Chapter 13 BankruptcyThe San Francisco Chronicle reported yesterday that the number of Bay Area homes that are “under water” (meaning that the homeowner owes more on the property than it is worth) has risen again. For the nine counties comprising the greater San Francisco Bay Area, that number has risen to 24.6 percent (a rise of nearly two percent over the previous quarter).

Second mortgages, most frequently home equity lines of credit (“HELOCs”), are a huge contributing factor to Bay Area homes’ negative equity because they pile another large secured loan on top of the regular mortgage adding to the overall mortgage debt burdening these properties. Fortunately, bankruptcy, in particular Chapter 13 Bankruptcy, gives us a powerful tool to combat these second mortgage loans.

If the present fair market value of a property has fallen below the amount owed on the first mortgage, and the owner qualifies for Chapter 13 Bankruptcy, then we can “strip off” the second loan or line of credit. That’s right, Chapter 13 Bankruptcy allows a debtor to entirely remove junior liens from real properties and treat that debt just like any other unsecured debt–like credit card debt for example. For the second mortgage lien to be forever stripped from the property, the debtor’s bankruptcy attorney must bring a motion to value the collateral (here, the house), and prove that the current fair market value is less than the outstanding balance on the first mortgage. Then the debtor must simply complete all payments in her Chapter 13 Bankruptcy plan. At the completion of the Chapter 13 plan, the second lien will be permanently removed from the property, and the debtor emerges from Chapter 13 Bankruptcy owning the home free and clear of that second loan or line of credit.

Chapter 13 lien stripping represents a very powerful form of mortgage debt relief for Bay Area homeowners. Our Bay Area bankruptcy attorneys have helped hundreds of clients filing for bankruptcy in San Jose and throughout the Bay Area, allowing them to get out of debt, and for many of them, we have stripped a second mortgage loan from their homes. For many people, it is their home equity line that is the biggest factor causing their home to be “under water” in the first place, and if they could only get rid of that line of credit, their home would be on the path toward again growing equity in the future. At the very least stripping the second mortgage would make their home far more affordable.

If you live in the Bay Area, and you believe that your home is worth less than your first mortgage, you may want to consider filing Chapter 13 Bankruptcy. Of course, Chapter 13 is not for everyone, so you should contact one of our experienced bankruptcy lawyers for a free consultation at 408-286-2766.

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