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Dealing with a second mortgage in the bankruptcy process

An Arkansas homeowner going through a bankruptcy may be concerned about issues relating to a home, especially if there is an interest in keeping the home as other debts are discharged. A second mortgage may present a concern due to the fact that it creates a lien against the home. A default on a second mortgage could result in foreclosure action, but bankruptcy may actually prevent this action by means of lien stripping. This is dependent on the type of bankruptcy filing selected.

In Chapter 7, used to liquidate one's debts, a second mortgage normally remains as a secured debt. Liens are not eliminated, meaning that foreclosure continues to be a possibility. Some individuals choose this method of bankruptcy due to the prompt dismissal of eligible debts, but if an individual wants to keep a home without threat of foreclosure in connection with a second mortgage, then Chapter 13 may be the best route. A second mortgage may be converted to an unsecured debt in this process, particularly if the home in question has little equity.

Although lien stripping is possible in such a scenario, it is important to note that the bankruptcy court does not handle the lien stripping. A Chapter 13 bankruptcy includes a repayment plan that can take up to five years to complete. At the conclusion of this plan, the remaining balance on a second mortgage may be discharged. At this point, lien stripping is completed by filing an application with the bankruptcy court. The individual is then responsible for contacting the lender to have the debt removed from credit reports.

A homeowner who finds that a creditor is uncooperative in stripping a lien may want to work with an attorney to ensure that the process is completed. It can be advisable to coordinate the entire process through an attorney to ensure that all steps are completed correctly.

Source: SF Gate, "How to Strip Away a Second Mortgage Through a Bankruptcy", Tony Guerra, December 01, 2014

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