Law Offices of David G. Arganian, Seattle, WA

Chapter 13 Can Help Defeat the Foreclosure Crisis

Many of today's homeowners have more than one mortgage on their home and are struggling to pay multiple mortgages. Some people are simply "walking away" from their homes because the value of their home is significantly less than the balances of their mortgages. However, I am convinced that thousands of homeowners would be in a position to keep their homes if these second and other junior mortgages were eliminated.
What most people do not realize is that these junior mortgages can be eliminated. Pursuant to Sections 506 and 1327(b)(2) of the United States Bankruptcy Code, it may be possible to have junior mortgages eliminated or "stripped off" in a chapter 13 bankruptcy. How? If the fair market value of your home is less than the balance of your 1st mortgage, then your 2nd mortgage is considered to be completely "unsecured". Therefore, in a chapter 13 bankruptcy, it is possible to "strip-off" the 2nd mortgage lien. Once the 2nd mortgage is stripped-off, it is no longer a secured debt and becomes an unsecured debt just like a credit card or medical bill.

In a chapter 13 bankruptcy, all of your debt is consolidated into one payment. You make this payment each month to a chapter 13 Trustee. The chapter 13 Trustee then distributes the money to your creditors according to your chapter 13 plan. How does this help with a 2nd mortgage? In a chapter 13 bankruptcy, it is possible that your unsecured debts can be paid at a percentage on the dollar. In short, the 2nd mortgage company, through the chapter 13 bankruptcy, is paid at the same rate as the rest of your unsecured debt, which is often at a fraction of the original balance. Once you have completed your chapter 13 plan, your unsecured debts will be discharged and you will have no further legal obligation towards them. For example, if someone has $20,000.00 of credit card debt and a $50,000.00 2nd mortgage that will be stripped off, the total amount of unsecured debt is $70,000.00. If the bankruptcy court approves a chapter 13 plan calling for the unsecured creditors to receive 10% of their claims, then you are only obligated to repay a total $7,000.00 of the unsecured debt. Instead of having a $50,000.00 2nd mortgage that will take years to pay off, it may be stripped off in a chapter 13 bankruptcy and paid at pennies on the dollar.

Eliminating second mortgages will produce staggering benefits. A greater number of homeowners will keep their homes, thus reducing the amount of foreclosures. People will start to see positive equity in their home years earlier without a second mortgage. Without second mortgage payments, people will have extra money in their pockets and spending will increase and consumer spending accounts for two-thirds of our economy.

You do not have to be behind on your mortgage payments to file a chapter 13 bankruptcy and have a second mortgage eliminated. A careful analysis by an experienced bankruptcy attorney will let you know what chapter 13 can do for you.

The first step in determining whether your 2nd mortgage can be stripped off is to get an appraisal of the property. The appraisal will tell you the current value of your home. Next, you will need to get a payoff letter from your 1st mortgage company, just as you would if you were selling your home. If the appraised value of your home is less than the payoff amount of your 1st mortgage, then it may be possible to have your 2nd mortgage stripped-off in a Chapter 13 bankruptcy. However, if the appraised value of the home is one penny greater than the payoff amount of the 1st mortgage, then the 2nd mortgage is considered to be partially secured and, therefore, not eligible to be stripped-off.

Eliminating 2nd mortgages is just one of the many ways a Chapter 13 bankruptcy can help people get back on their feet and get a fresh start.

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