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Using Bankruptcy To Eliminate The Underwater Second Mortgage
One of many important benefits of filing a Chapter 13 bankruptcy is the ability to "strip" a second mortgage or home equity loan encumbering the debtor's home. This strategy is especially important in today's market environment where many Arizona homeowners are significantly underwater. In many instances, the ability to strip an underwater junior lien can make the difference between being able to save the home and being forced into foreclosure.

Technically, lien stripping does not actually eliminate a second mortgage but rather converts it from a secured debt to an unsecured debt. By changing the character of the debt to unsecured status, the obligation is treated the same way as a credit card or medical debt. Unsecured debt can usually be discharged in a bankruptcy whereas secured debt must normally be paid in full or the collateral must be surrendered.

To illustrate the concept of lien stripping, consider the following scenario:

A home in Tucson was purchased in 2006 for $250,000. The debtor's home was bought with a $200,000 first mortgage, secured by a deed of trust, and a $50,000 second, also secured by a deed of trust. The value of the property has fallen with the current declining real estate market and is now worth only $180,000. Because the value of the property is now less than the amount owed on the first mortgage, the second mortgage has no value and, therefore, is totally unsecured.

In a Chapter 13 bankruptcy, the debtor in such a position, may file a proceeding with the bankruptcy court to have the undervalued second lien stripped from the property, meaning it can be treated in the bankruptcy plan as ordinary unsecured debt.

Lien stripping is just one example of debt avoidance, a legal concept that basically means having a debt legally cancelled or reduced. Other types of debt can also be avoided or reduced in a Chapter 13 bankruptcy. In some cases, judgment liens that impede a debtor's homestead may be stripped. Secured debts on other real estate or other types of property, may sometimes be "crammed down" to the current value of the collateral.

Lien stripping can be a powerful tool for the debtor under the right circumstances, trying to save a home from foreclosure. Many debtors are able to eliminate $25 to $50 thousand dollars, or more, of debt by eliminating the second mortgage. If you want to see if this strategy can help with your debt problems, call the Law Office of Barry W. Rorex for a free consultation.  (520) 495-7595
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