It is possible to get rid of second mortgages or equity lines of credit by filing a Chapter 13 bankruptcy case. All of our consultations are free and with lawyers Ryan C. Wood or Kitty J. Lin. Both have filed hundreds of bankruptcy cases in the Bay Area. A secured debt is only secured up to the value of the collateral. That means if you house is worth less than what you owe on your first mortgage, then any other mortgages you have are completely underwater and can be avoided when filing bankruptcy. You must complete the plan of reorganization for the deed of trust to be reconveyed. That means making every payment under the plan. Most plans of reorganization last from 36 – 60 months.
- – Purchased house in 2007 for $850,000
- – 1st Mortgage $600,000; 2nd Mortgage $250,000
- – Value of the house decreased since 2007 to $565,000
- – 2nd Mortgage of $250,000 is now completely unsecured, given the that the value of the house is less than what is owed on the 1st mortgage
- – 2nd Mortgage is underwater and has no equity or value
- – Chapter 13 can allow you to avoid/strip off mortgages that have no value
A motion or adversary proceeding to value your house must be filed and it is a good idea to obtain an appraisal of your house prior to filing the case. On-line value sources are okay, but if the value is close to what you owe on the first mortgage a detailed appraisal is necessary. If your mortgage company does not object to the value the court will enter an order or judgment valuing the house and avoiding the second mortgage as a secured debt.
If your mortgage company does object to the value of your house listed in the bankruptcy petition there will be an evidentiary hearing. Appraisers for you and for the mortgage company will provide testimony as to the value of your house. The judge assigned to your case will rule on what the court believes that value of the house is.
The order or judgment by the court as to the value of your house becomes part of the approved or confirmed plan of reorganization. For purposes of the plan the second mortgage or equity line of credit is valued at zero and treated as an unsecured debt. Again, once you complete the plan by making all of the plan payments that is when your mortgage holder must reconvey the deed of trust securing the mortgage.