Strip a second mortgage or home equity line of credit with Chapter 13

Are you underwater on your mortgage? Facing oppressive debt and interest charges piling up on a second mortgage or home equity line of credit? While these financial problems are certainly serious issues, thousands of other homeowners have been where you are – and dug themselves out with the help of a bankruptcy lawyer and a Chapter 13 filing.

Convert second mortgage or home equity line of credit to unsecured debt

When most consumers hear the word “bankruptcy,” they think of a Chapter 7 bankruptcy. Chapter 7 bankruptcy involves an almost immediate discharge of most types of debt. It is true that some Chapter 7 bankruptcies involve “liquidation,” or in other words, the sale of valuable assets owned by the filer. But, even in a Chapter 7 bankruptcy, many types of assets are “exempt,” meaning that the filer gets to keep them.

Chapter 13 bankruptcy is an entirely different process. Chapter 13 does not involve liquidation. Instead, filers are given protection from their creditors under the terms of a three to five year court-approved repayment plan. Over the life of the repayment plan, debts will be restructured and consolidated, often resulting in lower monthly payments. At the successful completion of the repayment plan, the balance of most types of remaining unsecured debts will be eliminated.

Unsecured debt is debt that is not attached to some asset. For example, credit card balances and medical bills are unsecured debt. A home mortgage, on the other hand, is secured debt; it is attached to your home, and if you fail to make payments, the creditor can seize the home.

The key to eliminating a second mortgage or home equity line of credit in Chapter 13 bankruptcy is to convert it from secured to unsecured debt. Like a first mortgage, second mortgages and home equity lines of credit are attached to your home. In the wake of the housing crisis, however, many homeowners owe more on their first mortgage than their home is currently worth. When this is the case, your attorney can make a filing with the bankruptcy court to remove the second mortgage or home equity line of credit “lien” from your home.

With the lien removed, the balance of your second mortgage or home equity line of credit will be added to your pool of unsecured debt – meaning any unpaid balance will be eliminated at the successful conclusion of your plan. Often, Chapter 13 filers only have to pay pennies on the dollar to entirely eliminate their unsecured debt balance.

Ask a bankruptcy lawyer to explain your options

Chapter 13 bankruptcy is a powerful tool for consumers who are carrying a heavy debt load, but have a regular source of income. Of course, it is not for everyone, and you should consult an attorney to discuss the best options for your individual circumstances.

Remember, it is never a good idea to try to “hang on” as long as you can before considering bankruptcy; you will have a richer variety of solutions at your disposal the sooner you seek help. If you’re in financial trouble, speak with an attorney today.10