Most people take out a second mortgage on a home when they are facing a financial crisis. The crisis may be averted in the short term, but when monetary issues return, homeowners can face two mortgages they have no hope of paying.
While seeking a life raft, you may be forced to consider a Chapter 13 Bankruptcy to provide some relief from the second mortgage. Help is available in bankruptcy, but the success you have can depend on some important factors.
When Your Chapter 13 Second Mortgage Becomes a Charge-Off
After having your house foreclosed on, you may be free of your first mortgage, but a second mortgage usually doesn’t go anywhere. If you stop making payments, the bank that provided your second mortgage may decide to designate your balance a “charge-off.”
A “charge off” is an accounting term that means that your creditor deems the second mortgage a loss and believes the debt is uncollectible. Your mortgage is declared a charge-off somewhere between six and eight months after you stop making payments. Don’t make the mistake of thinking you are now free and clear of the debt. You still owe that money.
Your creditor may turn over the debt to a collection agency. This agency will start to call and mail you letters trying to get you to pay.
The Chapter 13 Bankruptcy Option After a Charge-Off in California
If you just ignore the debt from your second mortgage, you will likely get sued by the collection agency. However, you have a few options once your second mortgage, also known as a junior mortgage, has been charged-off. The first option is to simply continue paying your mortgage. However, if you are in this situation then you likely don’t have the financial capacity to do so.
Another avenue that could provide relief is filing for Chapter 13 Bankruptcy. Filers should take advantage of certain benefits to convert the junior loan into unsecured debt. This puts the second mortgage in the same category as credit card debt.
In this case, the mortgage could be included in a Chapter 13 repayment plan while you enjoy protection from the lender.
The Steps in a Chapter 13 Bankruptcy
Chapter 13 Bankruptcy provides a long-term fix for your financial problems, but it’s a solution that will span years and require following a strict payment plan. You’ll first work out a manageable payment schedule to pay off a portion of your debt over a three to five period. If the bankruptcy court approves your plan, you begin your payments.
After successfully completing your Chapter 13 payment plan over a 36 to 60 month period, the discharge process is triggered. Your Chapter 13 Trustee will need to certify that you’ve completed all of your agreed-upon payments. If everything checks out, you’ll receive an “order of discharge” from the bankruptcy court. A judge forgives the rest of your qualifying debt that remains.
Mortgage Lien Stripping in Chapter 13 Bankruptcy
Chapter 13 can be used to help with a second mortgage by turning the secured debt of the loan (secured by the house itself) into unsecured debt. Chapter 13 filers take advantage of a process called lien stripping.
- A lien is a security interest the bank uses to protect itself when they offer you a mortgage for a home. The lien allows the bank to use your house as security in case can’t pay off your mortgage. They have the right to sell your home if you default on your loan. They can also collect money owed if you manage to sell the home.
- Lien stripping is a benefit of Chapter 13 Bankruptcy and allows the bankruptcy court to convert a junior mortgage into unsecured debt, removing the lien. The court takes this action so that the outstanding debt is eligible to be folded into the payment plan the Chapter 13 process relies on.
- The amount of the mortgage debt is usually greatly reduced so that the filer has a decent chance of paying it off over the three to five years agreed upon. Any remaining balance is discharged at the end of the Chapter 13 process.
Chapter 13 Bankruptcy Lien Stripping Qualifications
Lien stripping is used on a junior loan. It can’t be applied to the primary mortgage on a house. To utilize lien stripping you must be upside down on your junior loan, meaning the money you owe on your mortgage is more than the home is currently worth.
You could also face obstacles when a creditor objects to a lien stripping. The lender may question the value of the home or the equity you possess. In a hearing, these concerns are considered, and a new appraisal of the home could be ordered.
When Does My Second Mortgage Get Discharged?
Be aware that the lien on your second mortgage may not immediately get stripped away when you begin a Chapter 13 Bankruptcy payment schedule.
The lien may actually exist until you’ve completed your payments and earn a discharge. During the payment process, you are protected by actions against you from a creditor under the automatic stay, but that protection isn’t permanent until you pay your plan off.
This is important to remember in the event you don’t complete your Chapter 13 bid. The lien could return to your second mortgage, and you’d again take responsibility for the full balance.
The Benefits of Having a Qualified Bankruptcy Attorney
Your mortgage could be the biggest loan you’ve ever taken on. Your house plays a big role in your family’s life, but mortgage payments might leave you in constant fear of losing everything.
You don’t have to navigate this financially challenging process alone. A bankruptcy attorney can show you how to use bankruptcy as a tool instead of viewing it as a failure or a dead-end. Knowing the best way to take advantage of the bankruptcy process and when to take action is something a financial expert can help you determine.
Your attorney will make sure each document you file is 100% accurate and that the payments expected of you are reasonable for your financial situation. Don’t let a bankruptcy court decide these factors for you.
Contact a Bankruptcy Lawyer Serving Southern California
If you are looking for a bankruptcy attorney in Los Angeles or anywhere across Southern California, please contact us today. The attorneys with the Law Offices of Steers and Associates have guided hundreds of bankruptcy clients through difficult financial circumstances and made sure they are in the best position to reach their discharge day.
When you have questions about how filing bankruptcy can help you get out from under a primary or second mortgage, please reach out to us for a free and confidential consultation. We have helped clients across Southern California find the means to complete their bankruptcy and earn financial freedom from mortgages they have no hope of paying.
Elena Steers is an expert in bankruptcy law and debt negotiation in California and has worked on both sides of the bankruptcy process. She uses her experience in the courtroom to give clients a voice in a process that can sometimes make them feel helpless. Take a moment and read about her extensive background.
You may also find our online guide to bankruptcy helpful, The Ultimate Guide to California Bankruptcy.
Elena Steers is a highly experienced bankruptcy attorney, the founder of Law Offices of Steers & Associates, and previously worked as a Bankruptcy Trustee Assistant at the Office of the Chapter 13 Trustee in Los Angeles. Her current affiliations include the State Bar of California, National Association of Consumer Bankruptcy Attorneys, and Central District Consumer Bankruptcy Attorneys Association.