With the housing market showing few signs of recovering, many homeowners underwater on their mortgages are considering simply walking away from their homes and letting the lenders foreclose and repossess. Many believe that they will never catch up with the payments and that what is owed on a home mortgage is much more than the house is actually worth.
However, before going through foreclosure or walking away from a house, homeowners should be aware of other options available to them. Through a Florida chapter 13 bankruptcy filing, a homeowner may be able to strip the debt from a second mortgage or home equity line of credit (HELOC) off of their home, bringing the amount owed more closely in line with the current value of the home.
Lien Stripping in Chapter 13 Bankruptcy
Chapter 13 bankruptcy treats secured and unsecured debt differently. Secured debt is debt that has property backing it as collateral that a lender may repossess if a borrower stops paying on the loan, such as a home mortgage or car loan. Unsecured debt, such as credit card debt and medical bills, lacks such collateral.
In a chapter 13 bankruptcy, the court has the power to strip the amount of a second mortgage or home equity line of credit that exceeds the value of the home. For example, if a home currently valued at $200,000 has a first mortgage on it for $200,000 and a second mortgage on it for an additional $50,000, the Florida bankruptcy court is able to treat the second mortgage as unsecured debt and remove it from the homeowner’s mortgage obligation. The court may also discharge tax liens on property that exceed the value of the property.
But, special rules apply to stripping liens on debtors’ primary residences. A homeowner with a second mortgage on his or her home may only remove the home lien that is held by the second mortgage if the value of the home is below the amount that he or she owes on the first mortgage.
Once a chapter 13 plan is completed, the court can then discharge any remaining unpaid unsecured debt. Lien stripping helps Florida homeowners keep more of their property by reducing what they owe on the property to an amount more closely in line with the current value of the property. Homeowners can work on paying down the secured debt through their chapter 13 repayment plans – usually on much better terms than their creditors were offering.
Consult an Orlando Chapter 13 Bankruptcy Attorney
The rules regarding lien stripping in chapter 13 can be complicated and it is best to seek the advice of an experienced Orlando bankruptcy attorney if you are underwater on your Florida mortgage and are looking for legal advice to help you improve your financial situation.