In an article recently about shedding second mortgages, I am reminded that many people still do not realize that they can often strip their second mortgage forever in a Chapter 13 Bankruptcy. Although this article addresses homeowners in California, the same is true for our Florida clients.
The key is that your bankruptcy attorney has to show that your home is worth less in today’s market than the balance of your first mortgage. You do not have to be behind in your payments. You do not need the permission of the second mortgage company. Your attorney simply files a motion with the court to determine secured status, attaches exhibits of valuation (which can vary from the most recent tax assessment, a BPO, an appraisal or even comps), and waits to see if the mortgage company objects. Often, they do not bother or they consent. If they do fight it, the court will set an evidentiary hearing to determine the value if the bank brings evidence that the value is higher. Then you get into the dueling appraisal war. None of our cases have gotten that far and we’ve probably stripped off 50 2nd mortgages in the last couple years.
This is one way to drop your principal balance if the banks won’t agree. It may be the only way to save an underwater home and get back to paying its real value. It doesn’t matter what the second mortgage was used for, whether it was an 80/20 loan, or used to fund start up costs for a business, or payoff credit card debt or cars.
First mortgages are different. Bankruptcy laws currently prevent the modification of first mortgages by a bankruptcy court. The first mortgage owner can voluntarily agree to a modification, but the court cannot force one. However, there are growing movements among experienced bankruptcy attorneys to challenge the proofs of claims filed by the first mortgages. A successful challenge can result in reduced principal balances, modifications other than HAMP or other relief. Earlier we blogged about the result in a recent case where we challenged the proof of claim in a Chapter 13 bankruptcy and obtained a principal reduction from $129,000 to $49,000 and a 2.625 percent interest rate. This was after a failed modification mediation in the state foreclosure action.