Second Mortgage Bankruptcy
As declining home values in mid-Michigan have caused home values to depreciate or go “underwater,” which means below the amount that some homeowners owe. There is a new form of relief available now in Bankruptcy Court.
For homeowners with second mortgages, it is if the value of your home has declined to less than the total value of a homeowner’s first mortgage. The second mortgage has in effect become an unsecured loan.
When filing a Chapter 13 bankruptcy, which is a repayment plan, the bankruptcy filers usually pay 100% of secured mortgage debts only. If the second mortgage is entirely unsecured, it can be “stripped” of its lien on the property and pay only the same percentage amount as all other unsecured debts, which is usually a smaller percentage than a secured debt.
Treatment of unsecured debts varies from individual Chapter 13 plan depending upon the bankruptcy filer’s income, debts and allowable expenses. However, unsecured debts may be paid even as little as 10% or even just 1 % under the right circumstances. Which is based of the bankruptcy filer’s income throughout the course of a Chapter 13 plan, and discharged of remaining liability upon completion of the plan of debt reorganization.
How a second mortgage is stripped varies from the Eastern and Western District of Michigan, and from courtroom to courtroom in procedure, but not in the end result. Some judges will allow the second mortgage to be stripped in the Chapter 13 bankruptcy plan itself. Some require the value of home to be proved or disproved at an adversary proceeding. The most important determining factor remains, however, what the value of your home is at the time of filing for Chapter 13 bankruptcy.
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