Using Chapter 13 to Strip Away Additional Mortgages On a Nebraska Residence

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Calculator and mortgage applicationThis is the next post in my series on how the Chapter 13 bankruptcy process can assist “sub-prime” borrowers in Nebraska. My last post discussed how residents can use the chapter 13 process to prevent the foreclosure of their home. In this post I will deal with another issue that is common to many homeowners – using chapter 13 to eliminate additional mortgages on one’s residence.

The chapter 13 process can “strip” additional mortgages away from a Nebraska residence

It is not uncommon for Omaha residents, as well as others throughout the state, to have multiple mortgages on their home. Unfortunately homes are not worth what they once were. If you have multiple mortgages, and your home is worth less than the first mortgage, then you may be able to rid yourself of the second obligation. This is known as “stripping” the second mortgage. The way it works is straight forward; the second mortgage becomes an unsecured debt and that amount is included in your chapter 13 bankruptcy plan. It is treated like any other unsecured debt, such as credit cards, medical debt or past due phone bills. Upon the successful completion of your chapter 13 plan, the second mortgage is wiped out as well. As I discussed in my last post, you will be required to continue making the payments on the first mortgage.

This “stripping” can apply to additional mortgages as well as home equity lines of credit. If your home is worth $100,000, and your first mortgage has a balance of more than $100,000, then the additional mortgages and/or any equity lines can be stripped. If you have two mortgages and a Home Equity Line of Credit (sometimes called a “HELOC”), and the home is worth more than the first mortgage but is not worth more than the first two mortgages combined, then you will be obligated to pay both mortgages but the HELOC can be stripped away. Many Omaha residents have not only saved their homes, but stripped away additional mortgages through this procedure.

Chapter 13 cannot be used to reduce the principal balance of your primary residence’s first mortgage

There is a big difference between how chapter 13 applies to auto loans and mortgages on your primary residence. In the case of a car, you can “cramdown” the auto loan to match the vehicle’s value in chapter 13. You cannot, however, use the process to reduce the value of your first mortgage to match the current value of your home. This is an area that comes as a surprise to many people. The chapter 13 bankruptcy process can still be used to reduce your other monthly obligations, making your overall budget, including your first mortgage, much more affordable. Chapter 13 bankruptcy is often a great option for those trying to save their home.

Contact my office today to speak with an Omaha, Nebraska chapter 13 lawyer.

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