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Chapter 13 and lien stripping

On Behalf of | Mar 24, 2019 | Firm News

Are you considering filing bankruptcy? Do you have a second mortgage on your Florida home? If you answered yes to both of those questions, you may wish to consider filing Chapter 13 bankruptcy. With Chapter 13, you may be able to strip the second mortgage lien from your home and save your home from foreclosure

Unlike a Chapter 7 bankruptcy that discharges your consumer debt, including your credit card debts, a Chapter 13 bankruptcy allows you to reorganize your debts and substantially pay them off over three to five years. Usually, you can first renegotiate the debts with your various creditors, reducing your remaining balances and getting more favorable interest rates.

Secured versus unsecured creditors

So how does second mortgage lien stripping work? It all starts with the bankruptcy court dividing your creditors into two groups, secured and unsecured. Secured creditors, including your first mortgage holder, are those who hold collateral for the debts. Unsecured creditors, including your second mortgage holder, do not hold any such collateral. They therefore stand little, if any, chance of recovering the full amounts of the respective debts you owe them.

Your reorganization plan

Once you devise your debt reorganization plan and the court approves it, you begin paying your secured creditors per the plan. When your bankruptcy period ends, the court discharges your unsecured debts, including the second mortgage lien on your house. By now you have substantially reduced the amounts of your secured debts and can more easily continue to pay them off. As for your house, you now have only a first mortgage on it because the court discharged your second mortgage, thereby stripping any lien that your second mortgage lender held on your home.

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