What is a mortgage?
A mortgage is a loan; it is a legal agreement signed through a bank or other lender to borrow money typically used for the purchase of a home but also used for purchase of other property. Mortgages are also known as “liens” or “deeds.” When a mortgage is signed, you are able to live in the house or use the item as long as you make payments but essentially the lender owns the item. Pay back of the loan can be done by making monthly payments or selling the property and paying the lender.
There are typically two types of mortgages; a primary mortgage and a second or third mortgage. The lender of a primary mortgage has the right to be paid first before the lender of a second or third mortgage.
Getting Rid of a Primary Mortgage: Chapter 7 Bankruptcy
If your earned income is low enough (speak to an attorney to determine if it is), Chapter 7 bankruptcy can be filed. Chapter 7 bankruptcy means you do not have to pay back the primary mortgage; it is eliminated. However the lender can take back (foreclose) your property to pay the money that is owed.
If you only want to get rid of a second and/or third mortgage that is owed to a lender, consider Chapter 13 bankruptcy.
Getting Rid of Second Mortgages: Chapter 13 Bankruptcy
A second or third mortgage on a property is loan that was taken from a lender using equity in the property. Getting rid of a second/third mortgage is known as “lien stripping.” Lien stripping works if the mortgage balance is more than what your home is worth now.
An example of a second or third mortgage is a home equity loan. Eliminating second and/or third loans are done by the courts by changing the second mortgage to an unsecured debt (debt not backed up by as asset.) This removes the lien (a legal claim the lender has to be paid back the money you owe) and the lender doesn’t get the money owed to them.
You are able to keep the primary mortgage on your property under this plan if you can make payments to the lender.
Here’s an example of how Chapter 13 bankruptcy works:
The current appraised price of your house is $200,000 but you still owe $300,000 on the first mortgage. You have a second mortgage of $50,000.
If Chapter 13 bankruptcy is declared, any second mortgage amount owed is stripped or removed. You may then be able to maintain ownership of the house.
Disclaimer: This is not meant to serve as legal advice. You must consult a lawyer for proper legal advice.
Want To Know More?
To find out which bankruptcy, Chapter 7 or Chapter 13 is the right option for you, consult with your attorney or set up a free consultation with us today.