Stripping a second mortgage in bankruptcy

Most clients have the misconception that filing bankruptcy will modify a mortgage to make it affordable.  Unfortunately, this is often not the case. What a Chapter 13 bankruptcy can do is allow you to “catch-up” missed payments by stretching out the period to pay that money back.

Example:  Your mortgage is $1400 per month; you are in foreclosure, and behind $20,000. A Chapter 13 can stop the foreclosure, allow you to resume your regular payment of $1400, plus an additional bankruptcy payment to “catch up” the delinquency. In a 5 year plan this would be approximately $333 per month. ($20,000 / 60 months = $333)

A bankruptcy rarely reduces the first mortgage payment on a primary residence. What a Chapter 13 bankruptcy may do is “strip” or eliminate a 2nd and/or 3rd mortgage/equity line on your house. That can sometimes erase a huge amount of debt, in effect reducing your house payment. What is the test to “strip” a 2nd mortgage? There must be no equity above the first mortgage.  

Example:  Your house has depreciated to $200,000. The payoff on your 1st mortgage is $202,000. You may be able to eliminate a 2nd mortgage/equity line regardless of the amount.