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National Association of Consumer Bankruptcy Attorneys

We are a federally designated Debt Relief Agency under the United States Bankruptcy Laws. We assist people with finding solutions to their debt problems, including, where appropriate, assisting with the filing of petitions for relief under the Bankruptcy Code.

Wiping Out Junior Liens

If you own real estate with a second or other subsequent mortgage after your first, you might be able to remove that lien in a Chapter 13 Bankruptcy Case. This is becoming a much more “real” option these days as a result of Southern California’s declining real estate market.

Because of the significant drop in property values over the last 18 months, many second and other mortgages we see beyond the first are wholly unsecured.  In fact, in many cases, we are finding that even the first deed of trust/mortgage on the property is greater than the value of the house.  So how can you avoid a second lien on real estate?  A bankruptcy attorney with lien avoidance experience can use Bankruptcy Code section 1322 to help you accomplish the lien strip.

For example:  Suppose a debtor purchased a home at the top of the market towards the end of 2006 for $500,000.00 in La Habra, CA.  They purchased the house with a $400,000 first deed of trust from Countrywide and $100,000 second deed of trust from Wells Fargo.  Suppose now, in 2009, the house now has a market value of only $390,000. Since the property value is less than the balance of the first mortgage, Wells Fargo’s junior interest is not secured by the real estate anymore and they are considered “wholly undersecured.”  In a chapter 13 bankruptcy, you can “avoid” a “wholly undersecured” lien on your personal residence.    If one were to avoid the lien, then they would now have a house valued at $390,000 with only a first deed of trust for $400,000.  The $100,000 second was “stripped” from the property and is treated as an unsecured creditor in the chapter 13 case no different than a credit card obligation.

While lien stripping is most common on undersecured mortgages, there are also several other ways to avoid second mortgages in Bankruptcy.  Other examples of lien stripping can take place if 1) there is a balloon payment due during the life of the chapter 13 case, 2) the second is secured by other assets in addition to the house (personal property, road, ally, etc.), or 3) the property is not the “debtor’s principal residence.”  Moreover, if you are a farmer and file chapter 12, you can avoid all liens down to the fair market value of the property!   

So while many people are starting to surrender their real estate back to the bank, think twice before you make your decision and speak with a competent bankruptcy attorney.  You just might be able to remove the second mortgage and keep the house with a more affordable mortgage payment!  

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Kyllander Law, APC
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Brea, CA 92821

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