Saving Your House From A Second Mortgage In Bankruptcy
When Americans struggle for money, they often take out a second mortgage against their homes. However, as soon as you take out the loan, the loan places a lien on your house. Those who cannot dig their way out of debt end up running the risk of losing their house. However, bankruptcy provides some means of negotiating this difficult position.
In Chapter 13, it may be possible to strip a junior mortgage from your house and render it completely unsecured. The process is known as lien stripping and it’s one of the many ways that Chapter 13 can help you avoid foreclosure.
Getting rid of a HELOC lien
Home equity lines of credit are a tempting option for Americans in debt. Those who are already paying mortgages pony up their equity as collateral creating a second lien on the house, this time, from the new lender. The lien gives the lender certain rights to the property if the debt is not repaid. While bankruptcy can erase your duty to repay the debt, it also forces you to return the property.
HELOC loans work slightly differently. While the original mortgage is still attached to the house, the HELOC is attached to paid equity. In the case of liens, it’s a first-come-first-serve basis. So the original mortgage will always have priority over the HELOC. In that case, if the house was foreclosed on, the mortgage lender would be paid first and HELOC lender second.
Mathematically this creates a situation.
If the mortgage lender were to foreclose on the home, there’s a chance that the proceeds of the sale would be unlikely to leave money left over for the HELOC lender. In that case, the lien is said to be entirely underwater and is thus not “really” secured by anything. Since the lien is unsecured, it can be stripped in Chapter 13 and likely discharged.
What happens after the lien is stripped?
Once the lien is stripped, it is categorized as unsecured and is placed even lower in precedence than it was before. In most cases that involve lien stripping, the creditor does not recover their money, but that is the price of doing business, and the loans are occasionally predatory.
While the debtor no longer has a HELOC lien on their home, they still have to pay the original mortgage. Additionally, when it comes to your credit score, the amount of damage you take is directly related to the amount of money you discharge in bankruptcy. Stripping the HELOC will therefore damage your credit.
Nonetheless, Chapter 13 offers those in debt several vital ways to protect their home from financial difficulties.
Talk to a Jacksonville Bankruptcy Attorney Today
The Law Offices of Carol Galloway represent the interests of Jacksonville residents who are struggling with money issues. Call our Jacksonville bankruptcy attorneys today to schedule a free consultation and we can discuss your financial situation and the best way to resolve it.