Most of the attention during the housing crisis rightly went to first mortgages. However, numerous New Jersey homeowners also took out second mortgages in better economic times. In the aftermath of the Great Recession, those second mortgages add to the overwhelming amount of debt threatening to consume some residents. Fortunately, Chapter 13 bankruptcy could eliminate that second mortgage, along with residents’ other debt.

Lien stripping is how the process of eliminating a second mortgage in a Chapter 13 is described. When the outstanding balance of a filer’s first mortgage lien is more than the appraised value of the home, a second mortgage loan — and any additional mortgage loans on the home — are considered by the Bankruptcy Court to be unsecured debt. This changes the nature of the debt and how it is handled by the court.

Since it is considered unsecured debt, a second mortgage lien might become part of your payment plan. As such, the interest rate on the remaining balance becomes zero. Most repayment plans last anywhere from three to five years. Once the plan is complete, the remaining unsecured debt may be eliminated — including a second mortgage loan.

The Bankruptcy Court in New Jersey is not required to allow the stripping of a second mortgage lien. However, if your second mortgage is deemed unsecured debt, it will most likely require an extra hearing and an appraisal of your home. An attorney familiar with the Chapter 13 bankruptcy process should be able to advise you as to whether your second mortgage is eligible for lien stripping. More information about this and other Chapter 13 topics is available on our website.