Have a second mortgage on a house that is severely "underwater"? Then read on. You may find that there is an option you'd never thought about that can help you get rid of that second mortgage, sometimes without paying a penny on it.
First off, we have to talk about what a "secured debt" is. Secured debts are obligations that are secured by a particular piece of property, such as a house or a car. If you don't pay, they can take that property, whether through foreclosure or repossession. Having said that, we should all be able to see that mortgages on houses are secured debts, right? Of course, the answer is . . . maybe. What about a situation in which someone owes more on a house than it's worth? Is the mortgage fully secured, or is it secured just to the extent of the value of the property? And what about a second mortgage where the house is worth less than the FIRST mortgage. For example, what if a house is worth $80,000 with a first mortgage of $90,000 and a second mortgage of $20,000? Is the second mortgage really secured? If the second mortgage holder forecloses, how much money do you think they'd get? (Hint: the answer is A BIG FAT ZERO).
One of the problems is the initial appraisal used to get the second mortgage. Appraisals commissioned by mortgage lenders are notoriously untrustworthy. In all instances, they over-inflate the true value of the home, sometimes by ridiculous amounts. The reason for this? Because the mortgage lender has to make the loan "work". The loan cannot be underwritten if it doesn't have any equity and the loan-to-value ratio is too small. So how to fix this? Get an appraisal that shows that the house is worth more. When that happens, the the lender can give the second mortgage, brokers can get their commissions and the borrower can walk away with some cash in their pocket. So everyone wins, right? WRONG! Because it's all an illusion. There is no way the house can actually sell for the appraised value. If the borrower continues to pay on the second mortgage, then there is no harm. When they can't afford to, then the real problems start.
So how can you get rid of a second mortgage without paying for it? The answer is simple: Chapter 13 bankruptcy. If there is no equity attached to the second mortgage (the borrower owes more on the FIRST mortgage than the house is actually worth), then you can get rid of, or "strip", the second mortgage. In our example above, the borrower would be able to strip the second mortgage. And the amount of the second mortgage is immaterial. The only numbers that matter are the value of the property and how much is owed on the FIRST mortgage. Most courts are very particular in how you have to go about doing this and what appraisals are acceptable, so you should consult an experienced Chapter 13 attorney to do this for you. So what happens to the second mortgage? It is treated as unsecured and paid at whatever percentage the rest of your unsecured creditors are paid at. It is important to know, however, that stripping the second mortgage is contingent upon completing your Chapter 13 case and receiving your discharge. If your case is dismissed or converted to a Chapter 7 bankruptcy, the second mortgage stays secured. Also, if there is even ONE PENNY of equity in the second mortgage, the whole darn thing stays secured.
For more information on Chapter 7 and Chapter 13, visit my website at www.OhioBankruptcyRelief.com.
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