When you have a mortgage and you are underwater on your home or struggling to make payments, you may wonder if bankruptcy is an option to help you to deal with your housing problem. The fact is that you may be able to use bankruptcy to reduce your mortgage debt but only in very limited situations. In most cases, you cannot get rid of your mortgage in bankruptcy- but your bankruptcy attorney may be able to help you to get your other debts erased or brought down to a manageable level so your home will become affordable anyway.
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When Can Your Mortgage Debt Be Reduced?
It is difficult to have mortgage debt reduced or eliminated in a bankruptcy because the property serves as collateral for the loan. This means that if you don't pay the loan, it is set up for the bank to take the collateral (the house). It would not be fair for the bank to have granted the loan (and the lower interest rate available for mortgages) on the basis of the home serving as collateral and to then allow you to keep the home but not pay.
Because of the fact that the home is collateral for the mortgage, you will typically have to reaffirm your mortgage debt, catch up on any payments you might be behind on, and continue to make payments on time to keep your home- even though you file for bankruptcy.
However, there is one exception to this. That exception exists if your home really isn't serving as collateral for a second mortgage because the entire value of it would be wiped out to pay off the first mortgage. Consider, for example a person who owns a house worth $150,000. If there is a $150,000 first mortgage on the home and a $50,000 second mortgage on the home, there isn't actually any real collateral for the second mortgage. If the lender for the second mortgage foreclosed due to nonpayment, the home would be sold and the entire proceeds would have to go to pay off the first mortgage so the second mortgage lender would get nothing.
Because the second mortgage isn't really a secured debt in these cases, a bankruptcy lawyer may be able to help you to get this debt reclassified as what it is- unsecured debt. This would then mean that it could be included in a chapter 13 repayment plan and you might be able to pay less than the full amount the mortgage was for. This process is referred to as "lien stripping."
Lien stripping is very complicated and there are strict rules. It is also available only in limited chapter 13 bankruptcy cases. If you have a second mortgage (or a third mortgage, fourth mortgage, etc.) and you believe you may be eligible for lien stripping, it is imperative that you consult with an experienced bankruptcy attorney for assistance in finding a solution to your mortgage problem.
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