In the Las Vegas area, many homes have lost much of their value since the market plummeted around 2008. Now, many homeowners are left paying much more on their homes than what the home is now worth. Although there still is no good way to force the banks to reduce the principal balance of your first mortgage, Chapter 13 debtors can reduce their overall mortgage debt by eliminating second mortgages in appropriate cases.
How does this work? In a Chapter 13 case, a debtor may eliminate her second mortgage (or third or subsequent mortgage, for that matter) if the value of the home has dropped below the unpaid principal balance due on the first mortgage. This requires getting a formal appraisal done on the home and filing it with the bankruptcy court. (A formal appraisal usually costs between $250 and $300.) If you can show the court that if the home were sold at auction, the bank holding the second mortgage wouldn’t receive anything, the court will allow you to “strip off” the second mortgage. To put this in legal terms, where the second mortgage is shown to be completely unsecured, the court will allow the debtor to treat the second mortgage like any other unsecured debt in the Chapter 13 case.
This can save homeowners tens of thousands of dollars. It’s an important feature of Chapter 13 Bankruptcy. In fact, there are cases where homeowners file bankruptcy just to take advantage of this feature. And, stripping off second mortgages is not limited to primary residences. Debtors in Chapter 13 may eliminate second mortgages on rental properties, too.
If you’re having a hard time keeping up with the payments on a second mortgage, don’t despair. Talk over your options with a qualified bankruptcy attorney.