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At the hearing the 2nd loan on house was approved to be stripped. Now the lender is claiming it is unsecured? Can this loan be included in the plan to be repaid? Legal or not?

3 Thoughts on Chapter 13 Bankruptcy. 2nd mortage is approved thru the court does the laon have to be repaid?
  1. Reply
    February 16, 2014 at 1:35 pm

    Why are you asking us, call your lawyer.

  2. Reply
    February 16, 2014 at 1:47 pm

    that would depend on wether or not you can add the 2nd on at this time. usually you can. but since it is now unsecuredd why dont you refile under chapter 7 and discharge it.

  3. Reply
    February 16, 2014 at 1:48 pm

    You need to understand lien stripping in Ch 13 in order to understand what happened with your 2nd mortgage.

    Lien stripping can be done in Ch 13 when the value of your home is less than the amount of your first mortgage + the amount of your second mortgage (and any additional mortgages).

    The order of priority on liens (inside or outside of bankruptcy) is the order in which they were recorded. So your first mortgage holder basically has first crack at any property value with which to secure the mortgage.

    After the first mortgage holder’s interest is fully secured, then the 2nd mortgage holder gets to secure any amount of the 2nd mortgage with any remaining value left in the property. If there is none, then the 2nd mortgage holder is deemed to have an unsecured loan rather than a secured one (because there is no value above that securing the first lien with which to secure the 2nd).

    An example would probably help.

    Let’s say that your house used to be worth $ 150k and now it is only worth $ 100k.

    When it was worth $ 150k, you had a $ 100k first mortgage on it and applied for and received a $ 30k second mortgage (or HELOC, which is actually a 2nd mortgage). So now you have $ 130k worth of mortgages on the property: $ 100k for the first mortgage and $ 30k for the second mortgage.

    But let’s say the property value declined (for whatever reason) and is now worth only $ 100k. The first mortgage holder has a lien for $ 100k so the first mortgage holder gets all $ 100k of value as security for its lien. There is no additional value left after the first mortgage holder’s mortgage is secured. But you have a 2nd mortgage holder who has a lien for $ 30k.

    That $ 30k second mortgage is actually UNsecured, because there is nothing securing it.

    So (in Ch 13 ) the Sr mortgage (your first mortgage) is deemed fully secured by the value of the property and the Jr mortgage (the 2nd mortgage) is deemed unsecured. Then it is treated exactly the same as all your other unsecured debts (credit card, medical, utility company, etc.).

    That’s what lien stripping is in Ch 13 bankruptcy.

    SO — in answer to your question. Yes, the 2nd mortgage is now an unsecured debt rather than one secured by the property, and yes, it will be included in the repayment plan, and repaid at exactly the same rate as all other unsecured claims (i.e., if you pay 42% of other unsecured debts, you will also repay 42% of the now unsecured 2nd mortgage debt) and the remainder will be discharged at the completion of your Ch 13 plan.

    Yes, this is legal, common, and the very definition of lien stripping in Ch 13.

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