When seeking a loan modification, you will be at the mercy of your lender. They are not required by law to modify mortgage loans regardless of what concessions you are willing to make. If you decide that loan modification is not the best route for you, you may be able to eliminate your second and third mortgages through bankruptcy.
Sometimes the poor condition of the housing market can be used to your advantage. If your house has more than one mortgage, you might be able to get rid of a second or third mortgage on your home through Bankruptcy.
A very important advantage you gain when filing Chapter 13 Bankruptcy is that if your house is worth less than you owe on your first mortgage, which is called being underwater, you may be able to eliminate a second mortgage on your home entirely. This is called lien stripping.
How Lien Stripping Works
You own a home. The home is worth $140,000 and you owe $145,000 to the first mortgage on a 5% fixed rate mortgage. You owe $50,000 to the second mortgage, but even if you sold it over the next year there would be no one who would pay more than the $140,000 it is worth today.
You could let the home your home, you just can’t see paying $50,000 more than what it is worth and an extra $700 per month when you can barely repay the first mortgage.
The Solution: You file a Chapter 13 Bankruptcy plan with language in it to strip the second mortgage. A court motion is filed to demonstrate that the second mortgage is wholly unsecured. When the lien stripping motion is successful, the second mortgage will be treated as unsecured debt that will be discharged at the end of the plan.
By filing a Chapter 13, the second mortgage is treated just like the other unsecured creditors and you may only be required to pay back a small percentage from your monthly Bankruptcy payment plan. Once you finish the plan, the mortgage company can be forced to release the second mortgage.
However, if you are not under water on your first mortgage, you must treat the second mortgage the same way as you treat the first one, by paying a certain amount to the Bankruptcy trustee each month so that you can get caught up completely on the second mortgage by the end of your Chapter 13 case.
Lien Stripping can be only be done to a residential second and third mortgage if the house is worth less than the first mortgage. Furthermore, you can only eliminate a second or third mortgage through a Chapter 13 Bankruptcy. You cannot get rid of a second or third mortgage in a Chapter 7 Bankruptcy. It should also be noted that the rules are different for houses you own, but do not live in.