The Cassidy Law Firm Blog

Tuesday, March 11, 2014

Middlesex County Chapter 13 Bankruptcy: Removing a Second Mortgage

A homeowner in Middlesex County may take out a second mortgage for a variety of reasons. Sometimes it is done to free up cash for renovations on the home. Other times the funds are needed to pay for college while still others take out a second mortgage because an emergency has caused a financial crisis and liquid assets are needed just to pay the monthly bills. If the homeowner then files for bankruptcy at some point down the road it may be possible to “strip”, or remove, the second mortgage as part of that bankruptcy.

As a result of the recent recession endured by the United States, many homeowners find themselves in a position where they owe much more on their home than the home is worth in the current market. Home values across the country were rising at an unprecedented rate prior to the financial crisis that struck a few years ago. When the economy as a whole took a turn for the worse, home values did as well. In some real estate markets home values dropped by as much as 50 percent almost overnight. This creates a bad enough problem for a homeowner with a primary mortgage; however, for a homeowner with a second mortgage on the property as well it can be financially devastating. To illustrate, imagine that you purchased your home in 1998 for $150,000. By 2003 the home’s value had increased significantly to over $200,000. Since you had a child starting college that year you decided to take out a second mortgage of $50,000. Then the real estate bubble burst and your home’s value plummeted to just $120,000. The lenders are not concerned with the current market value of your home. Regardless of the decrease in value, you still owe $200,000 (minus the value of payments made on the principal to date) on the home.

Although the lenders may not be interested in the value of the home, it may be extremely important if you file for bankruptcy. In a Middlesex County chapter 13 bankruptcy you are required to devise a repayment plan that allows you to repay debts over an extended period of time – usually three to five years. Secured debts have priority over unsecured debts. If the current value of your home is less than what you currently owe on the first mortgage the second mortgage becomes an unsecured debt. When that occurs, it may be possible to discharge part of or the entire second mortgage.

Because the ability to remove a second mortgage through Middlesex County chapter 13 bankruptcy is very fact specific, consult with an experienced Middesex County bankruptcy attorney to determine if you will be able to discharge your second mortgage.

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