How to Strip Off a Second Mortgage

Bankruptcy can help you reduce your debts.

You may be able to get rid of your second mortgage if you file for Chapter 13 bankruptcy. This reduces your debt burden by the amount of your second mortgage, and allows you to afford your first mortgage payments more comfortably. In this way, a Chapter 13 bankruptcy can help you avoid foreclosure and keep your home. However, you have to meet several eligibility requirements, which relate to your income and your house value.

Instructions

1. Check your mortgage bill statements for the amount you still owe on both mortgages. A Chapter 13 bankruptcy can only remove your second mortgage if it is unsecured. This means that your current home value is so low that if you were to sell it now, you would only get enough to cover all or part of your first mortgage and you would have no money left to pay the second mortgage provider. For example, if you owe $250,000 on your first mortgage and $50,000 on your second mortgage, a Chapter 13 bankruptcy can only strip off your second mortgage if your home value is $250,000 or less.

2. Calculate the total amount you owe on both your secured debts and unsecured debts. Secured debts refer to the loans for which the lender can take possession of your property in case of non-payment --- for example, mortgages and auto loans. If you don't pay unsecured debts, such as credit card debts, your lender can't seize your property. Your total secured and unsecured debts have to be lower than the limits set by the U.S. Bankruptcy Code. These limits may change from time to time.

3. Consult a bankruptcy lawyer about your eligibility for a Chapter 13 bankruptcy. You also have to have a steady income, and cannot have filed bankruptcy within the past few years. The length of the waiting period varies depending on the type of bankruptcy. You may be able to have your first, no-obligation consultation for free.

4. Contact a credit counselor approved by the U.S. Trustee Program. The federal government requires you to go through pre-bankruptcy counseling before you file. During the counseling session, the counselor evaluates your financial situation, shows you various alternatives to bankruptcy, and prepares a budget plan. This session lasts 60 to 90 minutes and you can do it online, by phone or in person. At the end of the counseling session, you get a certificate.

5. File for a Chapter 13 bankruptcy with the bankruptcy court that serves your area. You need to complete the paperwork and provide various documentation, including the pre-bankruptcy counseling certificate, a schedule of your assets and liabilities, a schedule of your income and expenditures and a statement of financial affairs.

6. Attend a post-filing debtor education session by phone, in person or online. This lasts about two hours and teaches you about money management. The debtor education provider has to be approved by the U.S. Trustee for your judicial district. You receive a certificate at the end of the session.

7. Prepare a repayment plan and submit it to the court. This categorizes your debts and plans how you will repay your debts within a certain period of time. List your second mortgage loan as an unsecured loan and request that the court get rid of your second mortgage.

Tips & Warnings

• The bankruptcy law is complex and may change over time, so you should consult a bankruptcy attorney for advice.

References

• Scura, Mealey, Wigfield and Heyer, L.L.P.: How Do You Strip Off or Cram Down Second Mortgages
• Clear Bankruptcy: Debt Limits for Chapter 13 Bankruptcy
• Federal Trade Commission; Before You File for Personal Bankruptcy; November 2006
• United States Courts: Individual Debt Adjustment
• Nolo: Using Chapter 13 to Keep Your House