How choosing the right bankruptcy strategy can reduce your house debt
When you file for personal bankruptcy, you may have two options, Chapter 7 and Chapter 13 bankruptcy. If you qualify, Chapter 7 bankruptcy can eliminate most of your debt. New York, however, Chapter 7 bankruptcy cannot eliminate a second mortgage (or home equity loan). You need to file a Chapter 13 bankruptcy if you want to remove the second mortgage debt.
What is Chapter 13 bankruptcy?
Chapter 13 of the United States Bankruptcy Code (also called reorganization bankruptcy or wage-earner bankruptcy) is designed for people who have an income and want to keep their property. It’s often preferable to Chapter 7 because it lets you keep your house and develop a payment plan that allows you to take three to five years to make debt payments. Reasons people file for Chapter 13 bankruptcy include:
- Stopping foreclosure or repossession
- Not qualifying for Chapter 7 because you earn too much money
- Not qualifying for Chapter 7 because you don’t want to eliminate some valuable assets
- Having a second mortgage has your house so deep in debt that there is not enough equity to pay off the first mortgage in full
- Returning an investment property laden with debt to the lender
- Needing a mortgage loan modification or filing Chapter 7 in the previous 8 months
When you file Chapter 13, you propose a five-year repayment plan that needs to be approved by the bankruptcy court. You must show which debts you will pay in full and how that can be accomplished over 60 months or less. When you file for Chapter 13 your unsecured creditors (e.g. credit card debt) cannot charge additional interest. Your repayment plan may suggest that you pay your creditors a percentage (from 0 – 100%) of what you owe with payments made over 60 months.
Lien stripping to eliminate a second or third mortgage
Chapter 13 bankruptcy is a type of debt consolidation that lets you keep your home—if you keep your court-approved plan payments current. Under Chapter 13, your debts will be identified as those secured by property or unsecured debts that are not tied to an asset or property. A good bankruptcy lawyer can help you use lien stripping to get rid of junior liens (such as a second or third mortgage).
So, if you’re selling your home in a foreclosure process, you may eliminate your second mortgage if:
- You owe more on your first mortgage than your home’s fair market value
- The proceeds from the sale of your house will pay off your first mortgage with nothing left over
Since there is no
equity leftover to pay your second mortgage (or other junior lien on the
property), these debts become considered unsecured debt. You can then ask the
bankruptcy court to remove (strip) these debts from your list of debts.
Contact a Bronx bankruptcy attorney for a free consultation
Bronx bankruptcy attorney Thomas M. Denaro, Esq. has more than 30 years of experience helping New York clients overcome their financial problems. He can help you evaluate if using Chapter 13 bankruptcy to remove your second mortgage is an excellent strategy for your situation. If you live in the Bronx, Bronx and Westchester, Queens, Kings, Richmond, Suffolk, Nassau, Rockland, Orange, Putnam, and Duchess Counties, contact us today online or call (718) 863-6000 to arrange a free consultation with a bankruptcy attorney you can trust.