How to modify a 2nd mortgage using Chapter 13 bankruptcy
One of the best benefits of chapter 13 Bankruptcy is the leverage it gives us when dealing with mortgage companies. In many cases we can not only modify but even completely wipe out second and third mortgages. This process is called lien stripping.
It is important to recognize that almost all judges in New York require that you are eligible to receive a bankruptcy discharge before a mortgage can be stripped off. I will go over the basics in this article but you should get the guidance of an experienced Bankruptcy attorney to actually try this.
What is Equity in the property?
Put simply, your equity is the amount you would put in your pocket after all mortgages have been paid off. For instance, if you have a home that is worth $1,000,000 and there is a first mortgage of $900,000 you would have $100,000 equity. Many of you are probably thinking that there are brokers fees and other costs of sale involved lowering the $100,000 amount of equity. However, for our purposes ignore the costs of sale.
Here are some basic rules regarding lien stripping/modification:
*All mortgages on investment property can be stripped and modified or “Crammed Down” based on the equity the liens secure.
*Second and third mortgages on property purchased for and used as a home residence can be completely stripped if there is no equity securing the mortgage.
* First mortgages on property used as a home residence cannot be stripped.
Here are a few examples:
1. John has a home he resides in with $1,000,000. There is a first mortgage of $1,000,000 and a second mortgage of $250,000. John has no equity in the home.
2. John has the same home but has a first mortgage of $999,999 and a second for $250,000. John has $1 equity in his home.
3. John has the same home but has a first mortgage of $1,100,000. There is $0 equity in the home.
4. John has an investment property worth $1,000,000. There is a first mortgage of $900,000 and a second worth $250,000. John has $100,000 in equity for his investment property.
5. John has investment property worth $1,000,000. There is a first mortgage of $1,200,000. John has $0 equity in the property.
In example #1 the Second Mortgage can be completely stripped because there is no equity securing the mortgage.
In example #2 neither of the mortgages can be touched because it is a home residence and there is even $1 of equity in the first mortgage.
In example #3 the first mortgage cannot be touched because it is a primary home residence. If there were a second or third mortgage both could be wiped out.
In example #4 the second mortgage can be stripped of $150,000 because the second mortgage is still secured by equity in the property. (Remember this is an investment property so the rules are more lenient). So the second mortgage could be altered to only be $150,000. [$250,000-$100,000(equity securing second mortgage) =$150,000].
In example #5 the first mortgage can be crammed down to $1,000,000 (the amount of equity in the investment property”). Similarly, the entire value of the lien being crammed down must be paid through the chapter 13 plan.
Points:
The value of the property is determined by an appraisal or other qualified written opinion. It is always safest to go with a good appraisal. Remember, the bank can challenge the appraisal. The mortgage is not actually modified or stripped unless the Chapter 13 plan is completed. The amount of the lien that was stripped or modified is treated as general unsecured credit, like a credit card. For that reason this may impact the monthly cost of the bankruptcy filing. The amount of the lien that is stripped is discharged at the end of the Chapter 13 Bankruptcy. You should have your attorney bring the discharge order and lien strip order to the county recorder where the bank originally recorded the lien after the bankruptcy case is complete.
If you are interested in exploring your options on dissolving your mortgages contact an experienced bankruptcy attorney. My office is available for free consultations by calling 212-244-2882.