One of the benefits of Chapter 13 bankruptcy over Chapter 7 is flexibility. There are just lots of ways we can help your financial situation in a Chapter 13 that we just don't have the power to do in Chapter 7. One of the big ones is lien stripping--wiping out an underwater second mortgage.
1. What is lien stripping? Lien stripping is a way of removing an underwater second mortgage on a house in Chapter 13. If the house has two mortgages, and the second mortgage is fully unsecured, it may be removed. Here's an example:
- The house is worth $250,000
- The first mortgage balance is $251,000
- The second mortgage balance is $50,000
We can strip the second mortgage because it is completely unsecured.
2. How do I know my second mortgage is fully unsecured? You will most likely need to order an appraisal of your house. But the first step is to look at your property tax appraised value. During the housing boom, tax values used to be lower than the true value of the house. But now that housing prices are depressed, property tax appraisals are routinely higher than the appraised value of the house. If you have questions, we're happy to give you a referral to a licensed real estate appraiser.
3. If I can lien strip, what happens to my second mortgage? Instead of classifying the second mortgage as secured debt, which would need to be paid in full over the life of a Chapter 13 plan, a stripped second mortgage is classified as unsecured debt, meaning that it merely needs to be paid prorated with your other unsecured debt. In most Chapter 13 plans, this money comes out of the same pot that will already be allocated to your other unsecureds, such as credit cards and medical bills, so the second mortgage won't cost you any extra money over the plan. At the end of your plan, if you've made all your payments, the court issues an order that removes the second mortgage lien from your house, and you only have one mortgage to deal with.
4. Does Minnesota law allow lien stripping? Minnesota was the only state that did not allow lien stripping until August 29, 2011. The 8th Circuit Bankruptcy Appellate Panel, an appeals court that oversees Minnesota bankruptcy cases, issued its decision in Fisette v. Keller, allowing lien stripping in Chapter 13 cases filed in Minnesota. Since Fisette, we've stripped plenty of second mortgages. An experienced bankruptcy lawyer can advise you whether your second mortgage can be stripped.
If you want to know more about lien stripping, give us a call.