For years, New Jersey homeowners saw their homes rise in value. During this time, many homeowners took out second or third mortgages or home equity loans. Even now, eight years after the beginning of the housing crisis, many homeowners are still underwater in their mortgages, owing more than their home is worth.
The good news for homeowners is that debt relief is available in the form of “lien stripping.” Lien stripping allows homeowners to discharge second and third mortgages and home equity debt as if it were unsecured debt. For people considering Chapter 13 bankruptcy, this can significantly reduce debt, adding a bigger benefit to filing.
In order to qualify for “lien stripping” a home must be worth less than the outstanding mortgage. If this is true, the second mortgage will be considered unsecured debt. This distinction is important, because if a debt is unsecured, the second mortgage will be eliminated and the creditor will receive only a pro rata share, like any other unsecured creditor.
Consider for example a homeowner who owes $500,000 on a primary mortgage and $100,000 on a home equity credit line for a home that was currently worth only $400,000. In that instance, the homeowner would be able to “lien strip,” that is, consider the home equity line as unsecured debt in a Chapter 13 bankruptcy.
Conversely, if the same homeowner owes $300,000 on that same home currently worth $400,000, the homeowner would not be able to “lien strip” in a Chapter 13, and the debt would be consider secured debt.
For this reason, the timing of filling and the value of your home become important considerations if you are considering bankruptcy. If you are considering filling, let the attorneys of Levitt & Slafkes help. Our experienced bankruptcy attorneys know how to get the most possible debt relief and give you a fresh financial start.
If your household is burdened by debt, let the attorneys of help you explore your options. We represent debtors in Chapter 7, Chapter 13 and Chapter 11 filings. Contact our law firm or by calling 973-323-2953 to schedule a free initial consultation.