The housing crisis is all over the news and has affected millions of Americans throughout the country. Chances are that you probably know someone, perhaps even a family member, who is upside down in their mortgage or perhaps going through the foreclosure process. While some homeowners are choosing to deal with a substantial drop in the value of their home, others have made the strategic “business” decision to simply walk away. What most struggling homeowners fail to realize is that there are better options available that can allow them to retain their homes even during an economic downturn.
Typically, homeowners find themselves unable to pay their mortgage due to multiple loans. In other words, they have a primary loan (first mortgage) and a secondary loan to finance their home. In many cases, the struggling homeowner could retain their home if they were able to eliminate just one of the mortgages. While such a scenario sounds impossible, current bankruptcy law permits judges to modify certain forms of debt including auto loans, student loans and second mortgages. This works in cases where the value of the property is less than the amount of the loan, whereby the court reduces the balance of loan to the current (reduced) value of the property.
During a bankruptcy proceeding, the removal of a second mortgage is known as “stripping” the lien. An example of lien stripping is illustrated below:
• Value of the Home is $300,000
• First mortgage is for $300,000
• Second mortgage is for $100,000
The first loan is secured by the value of the home, but the second loan has nothing to secure it and can therefore be stripped when claiming bankruptcy. Furthermore, the second lender will likely be unable to collect after the bankruptcy has been completed, meaning that the homeowner will be free to retain the house.
If you think that you could benefit from lien stripping, consider contacting a qualified real estate bankruptcy lawyer before you decide to file.