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THE
NEW AND IMPROVED
UTAH BANKRUPTCY LAW HANDBOOK
HOW TO REMOVE A SECOND
MORTGAGE OR OTHER JUNIOR LIEN FROM YOUR PRIMARY RESIDENCE
LIEN
STRIPPING IN CHAPTER 13 ENABLES DEBTORS TO REMOVE BURDENSOME MORTGAGES
FROM THEIR HOMES
One of the most significant benefits
available to individuals under present bankruptcy laws is the ability to
remove a second mortgage or other junior lien from an individual's
primary residence in cases where there is not enough equity in the
home to secure the second mortgage or other junior lien.
This means that if you have two mortgages against your home, you can remove
the second mortgage if your home is worth less than you owe on the
first mortgage. If your home is worth less than you owe on
the first mortgage, in reality, there is insufficient value in your home
to secure the junior lien holder.
For example, a couple's home is
worth $225,000.00. The principal balance of the first mortgage
against their home is $230,000.00, and they owe $55,000.00 on a second
mortgage. This couple could seek to have the second mortgage
removed from their home in adversary proceedings in a Chapter 13
bankruptcy case.
Another example is where an
individual's home is worth $230,000.00, they have a first mortgage of
$190,000.00, a second mortgage of $40,000, and a third mortgage in the
amount of $12,000.00. Since there is insufficient equity in the
home to secure the third mortgage, so the third mortgage could be
eliminated in adversary proceedings in a Chapter 13 bankruptcy
case.
To eliminate a lien against your
primary residence in Chapter 13 bankruptcy proceedings, it is necessary
for your bankruptcy attorney to initiate legal proceedings (called an adversary
proceeding) within your bankruptcy case against the junior lien
holder. The only issue in the litigation against the junior lien
holder would be the value of your home. Evidence of your home's
value may consist of appraisals, tax notices, your observations of home
sales in your neighborhood and other similar factors. In
evaluating whether or not you are eligible to seek removal of a second
mortgage (or other junior lien), the property value you should consider
is what you actually believe you could sell your home for if you put it
on the market. Appraisals obtained for purposes of refinancing are
often high.
If individuals are successful in
removing second mortgages and other junior liens from their homes, the
debt to the junior lienholder will be treated as a general unsecured
claim under the individual's Chapter 13 Plan. This means that if
the Debtor is paying 15 cents on the dollar to their unsecured creditors
under the terms of a Chapter 13 Plan, they would also be required to pay
15 cents on the dollar on the debt previously secured by a lien on their
home. No interest would be paid on this unsecured debt.
Many individuals are unable to retain
home ownership because of a second mortgage with large monthly payments
they are unable to pay. Removing a lien and eliminating a second
mortgage payment enables them to retain their homes. Further, from
a practical standpoint, for many individuals it is preferable to
surrender their homes and than continue to pay a fully unsecured second
or third mortgage. If they can remove the second or third
mortgages from their home, payment of the first mortgage is generally
consistent with what the home is worth.
DISCLAIMER
NO INFORMATION OR MATERIALS CONTAINED HEREIN ARE INTENDED
TO CONSTITUTE LEGAL ADVICE, AND IS NOT APPLICABLE TO ANY SPECIFIC SET OF FACTS,
ESPECIALLY AS TO ANY INDIVIDUAL'S PERSONAL SITUATION. THE INFORMATION
CONTAINED HEREIN NOR THE PERUSAL OF IT DOES NOT
ESTABLISH NOR CONSTITUTE AN ATTORNEY-CLIENT RELATIONSHIP WITH EVELAND &
ASSOCIATES OR ANY OF ITS ATTORNEYS.
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