When you go through a bankruptcy, a court may not only delay a foreclosure process; they may actually void a second mortgage so that the debtor does not have to keep making mortgage payments. Reducing or eliminating mortgage payments is done through a process called lien stripping.
When people fall behind on their mortgage payments, lenders may choose to start a foreclosure process. When this happens, they will place a lien on the debtor’s house, making a financial claim against the value of the house in the event it is sold.
For a variety of reasons, many homeowners take out a second mortgage on their home in addition to their first mortgage obtained at purchase. The second mortgage is subordinate to the first. This means that in a bankruptcy action, the repayment of the first mortgage takes priority over repayment of the second mortgage. In some cases, courts will consider the second mortgage to be an unsecured loan.
This is generally the case when filing for a Chapter 13 bankruptcy. The debtor can ask the court to convert the second mortgage into an unsecured debt. This is known as lien stripping.
Once that second mortgage has been converted to unsecured debt, it can be discharged as part of the bankruptcy, or terms will be put in place that will allow for only a partial payment to take place. Much of this depends on the details of a particular Chapter 13 repayment plan.
It’s important to remember that lien stripping cannot take place on the first mortgage of a home, and this process is not available if a debtor chooses to go through a Chapter 7 bankruptcy instead.
Faletti Law Office focuses on family law, tax law, bankruptcy and estate planning for clients in Bloomfield and the surrounding Colorado communities of Arvada, Westminster, Northglenn, Commerce City, Erie, Brighton, Lafayette, Longmont, Firestone, Thornton, Adams County, Jefferson County and beyond.