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 “down payment," 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? Can you eliminate that monthly payment from your budget in order to free up money for other necessary living expenses?

Getting Rid of a Second Mortgage in Bankruptcy

This is called “stripping off” a mortgage, and it 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.

So What Do I Do?

Naturally, no one should file bankruptcy just to strip off a mortgage. But if you have to file to rid yourself of other debt, removing that second mortgage may well be an option. However, if it is, it isn't something you want to handle yourself; it's just too complicated. Get a lawyer to help you.

If you live in Burlington, Camden, Gloucester, Salem or Cumberland County, are considering filing bankruptcy, and are ready to take action, then 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.

Not sure if bankruptcy is right for you? Take the quiz to the right to find out more!

Steven J. Richardson
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Bankruptcy, Collections, Student Loan, DUI and Traffic Court attorney in Woodbury, NJ.

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