Certain Chapter 13 filers may be able to get rid of a second mortgage or home equity line of credit (HELOC) (referred to as “lien stripping”). With the real estate market going down over the past few years, some homeowners owe more on their mortgages than their homes are worth. A Chapter 13 bankruptcy may enable you remove a second mortgage or HELOC lien from your home and reduce the amount that you owe.
In order to remove or strip down a second mortgage or HELOC, the value of your home must have declined enough so that the loan or HELOC is no longer secured by your equity in the home. To prove this, you will need to obtain a professional appraisal of your home before you file bankruptcy. That appraisal must show that the fair market value of your house is so low that if your house were sold there would not be enough money after paying the first mortgage to pay anything to the second mortgage holder.
Example: Your balance on your first mortgage is $400,000. You have a second mortgage in the amount of $50,000. Your home is currently worth $375,000. In this scenario, your second mortgage is no longer secured by the equity in your home, since only $375,000 of the first mortgage is secured by your equity. Because the second mortgage is no longer secured, you can seek to strip it off.
You may not strip off a second mortgage that is partially secured by your equity in the home. This means that if the value of your house is sufficient that even part of your second mortgage could be paid out of a sale, it is partially secured and the second mortgage cannot be removed through bankruptcy.
Example: Your balance on your first mortgage is $400,000. You have a second mortgage in the amount of $50,000. The current market value of your home is $425,000. In this scenario, your second mortgage is secured in the amount of $25,000. This is because your home value ($425,000) minus the balance of your first mortgage ($400,000) leaves you with $25,000 in equity, which secures part of your second mortgage. You will not be permitted to strip off the second mortgage in this case.
In the District of New Jersey, debtors are required to address the lien stripping in their Chapter 13 plan. If you raise the issue in your plan, and the second mortgage or HELOC lender objects, the court may schedule a hearing where you and the lender can present evidence. Please note that the burden of proof is on you.
If the judge rules in your favor, the lien secured by the second mortgage will be removed from your home, and the loan amount will become part of your unsecured debt, and paid along with your other unsecured debt according to your Chapter 13 plan, typically as a fraction of the actual loan balance.