Due to the general decline in the real estate market, many people are finding themselves with homes that have lost so much value that, despite large down payments, they now find themselves with significant negative equity. Under certain conditions, debtors who file a Chapter 13 case can strip away their junior mortgages and significantly improve the financial position on their home. In order to do this, the debtors’ house must be underwater to such a point that the house is worth less than what is owed on the first mortgage. Additionally, the debtors will have to qualify for a chapter 13, and will likely have to complete a five year plan. Only then can the junior mortgages be stripped away.
There are some limits on the amount that can be stripped too, because the liens that are subject to being stripped are essentially treated as unsecured debt and Chapter 13 bankruptcies have a limit on the amount of unsecured debt subject to discharge. However, under the right set of circumstances, the ability to strip a lien can result in setting aside sizable junior mortgages is a powerful tool.
Contact a competent bankruptcy attorney to discuss the availability of this option for your situation.