Debtors Strip Their Second Mortgage Without Having To File Chapter 1...

Some people with minimal credit card debt file Chapter 13 bankruptcy primarily to strip a second mortgage. You may be able to accomplish the same result without filing bankruptcy now that banks are becoming somewhat more flexible to work out mortgage solutions on upside down property. I’ve heard of cases where a second mortgage company will substantially reduce a second mortgage balance and permit the debtor to pay off the settlement amount in installments. Here is one real example.

A couple had a first mortgage equal to or a little less than their house’s fair market value. They had a second mortgage of approximately $120,000. They were willing to let the house go if they had to pay both mortgages, but they wanted to keep the house if they could “strip” the second. They had about $15,000 of joint credit card debt. They wanted to avoid any bankruptcy if possible.

The couple stopped paying the second mortgage. They hired an attorney to defend any foreclosures and to negotiate with the second mortgage company. The attorney was able to reach a settlement with the second mortgage lender whereby the lender agreed to accept $15,000 as payment in full of the second mortgage. Furthermore, the second mortgage lender agreed to let the debtors pay the $15,000 settlement over three years in monthly installments. After payments were completed the second mortgage would be satisfied in full.

The couple “stripped” their second mortgage without having to go through Chapter 13 bankruptcy. I think their result was much better than filing bankruptcy. The couple will have less credit damage and they avoided paying 10% trustee fees on top of the mortgage payment. In Chapter 13 the debtors would have to pay all of their disposable income to the trustee for five years, and as a result, they may have had to pay much more money to the second mortgage lender during the five year plan in order to release the mortgage. The settlement strips the second mortgage in only three years rather than the five years required for a discharge and strip in Chapter 13 bankruptcy.

If you are thinking about Chapter 13 bankruptcy to strip a second mortgage, or stripping  first mortgages on investment properties, consider hiring a good real estate attorney in order to achieve a better result through negotiation with your lenders.