Get Rid of That Ugly Mortgage For Good with Mortgage Forgiveness!
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Can you really get rid of your mortgage and be forgiven on the amount owed? Sure you can! BUT you’ll have to file bankruptcy, complete a payment plan, and have a qualifying mortgage. I didn’t say mortgage forgiveness was easy.
Qualifying Mortgage?
A mortgage is the common term for a security interest on your home. You may have heard the terms “deed of trust”, “home equity line of credit”, “secured lien”, etc. All of these are types of security interests and in certain circumstances they can be voided through the bankruptcy process.
In the bankruptcy context, a person or couple filing for bankruptcy can void the “home equity line of credit” or the 2nd and 3rd mortgage when the value of the home is undersecured by the first mortgage. If your home is valued at less than what you owe on your first mortgage, the Bankruptcy Court can void any other liens on your residence. This is called “lien stripping” because the Court strips the lien, or security interest, from the property.
Yes, that does mean you are stuck with the first mortgage, but by getting rid of secondary liens on your real estate through bankruptcy you receive three very big positive outcomes:
- You no longer owe the loan for the second or third mortgage or HELOC or any other secondary liens…EVER!
- Since you no longer owe on the loan, this saves you a couple hundred dollars a month in payments you would have ordinarily paid.
- Since the secondary lien is voided, you may be slightly underwater with the first mortgage, but that much closer to begin seeing equity develop in your real property.
Chapter 13 Bankruptcy is the vehicle for the lien strip
You’ll have to file bankruptcy in order to receive the benefit of a lien strip. Additionally, there are a few other requirements:
- Only chapter 13 debtors are able to receive this form of mortgage forgiveness. Section 1322(b)(2) gives the Debtor the ability to modify the rights of secured claims. There isn’t a provision in a Nebraska Chapter 7 bankruptcy that would allow lien stripping on your personal residence.
- Additionally, the second mortgage must be “wholly unsecured”. This means the value of the home must not be secured by any portion of the second mortgage. For example, if your home is worth $100,000 and you have a first mortgage balance of $95,000 and a second mortgage balance of $10,000, the Court would not be able to void the second mortgage because it is not “wholly unsecured”. In our example, $5,000 of the loan is secured by the value of the property. Now if your home was valued at $100,000 and you owed $105,000 on your first mortgage and $10,000 on your second, the second mortgage is wholly unsecured. No portion of the value of your home is secured by the second mortgage. The mortgage can be forgiven and can be stripped.
- Lastly, while you can strip the second mortgage in chapter 13, in order to achieve mortgage forgiveness, you must complete your bankruptcy plan successfully and receive a discharge of debts. If your chapter 13 bankruptcy is dismissed for whatever reason, the loan is not stripped and you would still be responsible for it.
Time Is Of The Essence
Timing is really important in determining whether you can have mortgage forgiveness through a bankruptcy. The filing date of a bankruptcy is the date that is used in determining the value of your home for purposes of the lien strip. Every month you wait you gain more equity in the first and second mortgage by the payments you are making. Additionally, housing values are beginning to rise. If you wait too long the value of your home may be in excess of the first mortgage loan balance and you would not be able to strip any additional liens.
Talk with an experienced Omaha Bankruptcy Attorney to review your situation and see if you could benefit from mortgage forgiveness through a bankruptcy lien strip.