Traditionally a Chapter 13 bankruptcy was filed in order to help a homeowner who experienced a job interruption or other financial hardship stop a judicial sale of their home in a foreclosure. The Chapter 13 allowed the homeowner to cure the mortgage arrears over a 3-5 year time period. That situation is still a reason to file Chapter 13 but with the recent dramatic fall in home prices, Chapter 13 can help a homeowner in a different way if the homeowner has more than one secured loan on the property.
Over the past few years we have seen the problem of homeowners borrowing against non-existent equity from their homes with over-inflated values and the lenders willing to extend that credit in exchange for a second mortgage on the real estate. With the collapse of the real estate market homeowners are seeing their home become upside down by tens of thousands of dollars and questioning the economic sense of keeping that asset if non-bankruptcy loan modification programs are not an adequate solution to their predicament.
Chapter 13 may help those with multiple liens on their home. Bankruptcy can not help when it comes to a first mortgage secured only by the homeowner’s principal residence except for providing time to cure a mortgage arrear. However, Chapter 13 can be used to “strip off” a second, third or more mortgages on the homeowner’s principal residence. This approach can provide a great deal of financial relief to the homeowner with the over encumbered home. Assuming other requirement are met to file Chapter 13, a homeowner that refinanced/purchased with a second mortgage(s) of $60,000.00 that now sees his home value far below the payoff balance on the first mortgage maybe able to “strip off” that $60,000.00. The homeowner maybe able to eliminate that monthly payment to the unsecured lender and use those freed up monies to fund a Chapter 13 plan where he may end up paying only 10 cents on the dollar on that debt over a five year period.
This possible “strip off” of unsecured mortgage(s) is not automatic. The homeowner’s case has to meet the requirements of a confirmable Chapter 13 plan. Also the unsecured lender may contest the valuation of the property or attack the case in some other approach.