We are going into a Chapter 13 shortly. Our first mortgage is current, but our second is not. We are in Ohio, and I have read conflicting things about second mortgages. I have read that the second mortgage may be considered unsecured and discharged. Is that true?
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Here is a Lien Stripping Example:
* Home is worth $200,000.
* The first mortgage is $200,000.
* A second mortgage (or in certain states, a deed of trust) for $100,000.
* Lenders are only secured up to the value of the property. In this case the first lender is secured by the property value.
* The second lender has nothing securing their lien. They are unsecured because the property has no value left over from the first lien. In a Chapter 13, you can lien strip the second lender.
* The second lien is treated as an unsecured creditor.
* Most likely the second lender will not be able to collect on the mortgage after the bankruptcy discharge and the homeowners (debtors) still get to keep the house.
* The homeowner would not even have to pay the lien when they sell the house.
Liens can be stripped off of the debtor’s assets in Chapter 11 or Chapter 13 when there is not enough equity in the asset, after deducting senior liens from the property’s current market value, to secure the unsecured in whole or in part, where the lien exceeds the value of the debtor’s property. Section 506 of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. To the extent that the claim exceeds the value of the collateral, that portion of the claim is unsecured.
Despite the general rule, two exceptions may apply so as to allow lien stripping of a mortgage on a personal residence: loans based on a home plus other collateral. Lien stripping is prevented only when the lien is secured “solely” by a personal residence. Court decisions have made it clear that when the debtor has given other collateral (in addition to the personal residence; e.g., office equipment) as security for the mortgage, lien stripping will be allowed. Thus, if you will be taking out a second mortgage or refinancing your home, you should consider offering additional collateral, such as furniture, as security for the loan. This can be done under the guise of seeking better terms from the lender, such as a lower interest rate.
Many (but not all) bankruptcy courts follow a rule that makes a second mortgage totally unsecured if the first mortgage balance equals or exceeds the value of the personal residence. This exception will not apply in the case of a refinancing of a mortgage, since in a refinancing the new mortgage pays off the first mortgage. The exception is predicated on there being two distinct mortgages (a first and a second mortgage). For this reason, if you have the option of financing your business through a second mortgage or refinancing your first mortgage, the second mortgage may be the better choice, especially where the amount of the first mortgage is close to the value of the home.
In addition, remember that the general rule applies only to a lien secured solely by a personal residence. Thus, lien stripping will be not allowed for a mortgage on a building used in a business. -
Too simplyfy Optimistics wonderful post.Originally posted by tpod View Post
Yes, that is true, IF, there is Zero equity that attaches to the 2nd mortgage. Meaning, the value of your home must be equal to or less than the 1st mortgage.Comment
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Interesting information and I thank you. The first mortgage is $104,000 and the value given by the sheriff is $108,000. The second mortgage is $50,000. Everything is such a mess.Last edited by tpod; 02-16-2009, 01:03 PM.Comment
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If that is that the case, you would not be able to strip the second mortgage, AT ALL. You need to get a full blown appraisal. The sherrif simply starts the foreclosure bidding based on a formula, it is not designed to be an estimate of the value of the home.Originally posted by tpod View PostComment
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