Can You File a Chapter 13 Bankruptcy on a Second Mortgage But Keep the House in New Jersey?
by New Jersey Chapter 13 Lawyer Andrew M. Carroll
In the aftermath of the real estate crisis, many Americans have found themselves underwater in their mortgages. In fact, a recent study revealed that a shocking 6.4 million homeowners are still upside down in their mortgages, despite the fact that overall home prices have risen dramatically. Nationally, there are over 48,988,792 outstanding mortgages. Over 6,000,000 are considered negative equity mortgages, in which the homeowners owe more than the property is worth. Another 1,548,082 are near negative equity. In New Jersey, of the 321,260 outstanding mortgages, 18,618 are underwater. Another nearly 9,000 homes are considered to have near negative equity.
For the tens of thousands of individuals trapped in upside down mortgages, Chapter 13 bankruptcy may offer significant relief. Chapter 13 bankruptcy can provide a tool to “strip” junior mortgages. Often, underwater homeowners took out second mortgages on their property, to be used for home improvement or to simply pay down debts. In the lagging housing market, it is frequently these second, or even third, mortgages that cause the overall debt to exceed the value of the home.
Under Chapter 13, a debtor can file a lawsuit during the bankruptcy process asking the court to modify the rights of the junior mortgage holder. Generally, all mortgages are considered secured debts, with the home acting as security. However, the Bankruptcy Code states that the second mortgage is only secured against the property if the value of the property is more than the first mortgage. For instance, if the debtor has a home worth $200,000 and has two mortgages, the first for $211,000 and the second for $40,000, then the second mortgage is not secured. Accordingly, the bankruptcy court can “strip” the second mortgage from the home and turn it into unsecured debt. Some or all of the unsecured debt can then be discharged under a successful Chapter 13 bankruptcy.
The most important element to achieving the stripping of your second mortgage is the home appraisal. If you are considering filing for bankruptcy under Chapter 13, obtain a full appraisal of your home before you file. Housing prices have behaved so erratically over the past few years that many homeowners lack an accurate understanding of their home’s true value. It will cost you some money for the appraisal, but the potential savings well justifies the expenditure. With the appraisal in hand, your bankruptcy attorney can better advise you as to whether your junior mortgage may be stripped.
You should not expect your mortgage to be stripped automatically—it may involve a courtroom battle. The mortgage company holding the junior lien will be significantly affected by the discharge of the debt, so they will challenge an action to strip. The bank can order a separate appraisal and offer it to the court as evidence the mortgage should not be stripped. From there, it is up to the bankruptcy court to decide which appraisal to accept.
Although it can take some effort and outlay of costs, obtaining a discharge from your junior mortgage through Chapter 13 bankruptcy can provide substantial financial relief. Homeowners left underwater from the recent housing collapse should approach a knowledgeable bankruptcy attorney for a thorough evaluation as to their potential options under Chapter 13.
Free New Jersey Bankruptcy Chapter 13 Consultation – Save Your Home
New Jersey Chapter 13 Bankruptcy Attorney Andrew M. Carroll is committed to ensuring each of our clients receives unparalleled legal representation. Attorney Carroll will fully explore your bankruptcy options and select the best means of helping you achieve a bright financial future. Call us today at (609) 400-1302 to schedule your free debt relief and chapter 13 bankruptcy consultation.