Many people here in New Jersey have more than one mortgage. This may be because they purchased it with an 80/20 loan (one loan for the “downpayment," another for the remainder of the purchase price), borrowed money for a home improvement like a kitchen remodeling, or got a debt consolidation loan.
Either way, many times when they fall into financial hardship, that second mortgage payment can become a burden. The question becomes, if you have to file bankruptcy, can you get rid of it? “Stripping off” a mortgage in bankruptcy is possible, but there are three things to bear in mind.
1. You Must File a Chapter 13 Bankruptcy
You can only do it as part of a chapter 13 debt repayment plan, not a straight chapter 7. This can be a barrier to many people, as they are not in a financial position to handle a chapter 13. Their budget has to allow for money available to pay into the plan, and most folks considering filing are barely making it.
2. Your Home Must Be Worth Less Than the First Mortgage
The home has to have a value substantially lower than the balance owed on the first mortgage. What do I mean by “substantial”? Well, if even so much as $1 remains of value over and above the first mortgage lien, that is enough for the second mortgage to survive.
Also, the second mortgage holder is most often going to put up a fight and produce their own appraisal, so you want to be sure yours shows a figure as low as possible when compared to the first mortgage lien.
3. You Must Complete Your Plan
Most importantly, even if you win the motion to have the second mortgage “stripped off,” you have to complete your plan and get a discharge! This can be the most difficult condition to meet, as a lot can happen during your three to five year plan, and most chapter 13s fail for one reason or another. So be sure that your plan is solid, that your monthly expenses are calculated as accurately as possible, and that your income stream is reliable.
If you get through your chapter 13 after winning your motion to strip off the loan, you can emerge from bankruptcy with one less mortgage payment and be in a better position to recoup equity down the road as your home increases in value and you pay down the principal on the first mortgage.
If you live in South Jersey and are considering filing bankruptcy, call my office at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your case.
If you are looking for more information about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.