Arkansas homeowners who are facing financial hardship may be exploring their options under the U.S. Bankruptcy Code. Although Chapter 7 bankruptcy is an option, Chapter 13 is more suitable when mortgages are involved. This option allows homeowners to reorganize their debt repayments by drafting a plan to schedule payments over a period of three to five years following the approval of the court. The home will be included in the plan, and as long as payments under the court-approved plan are kept current, the homeowner will not lose his or her home.
A home forms part of the secured debt that is regarded as collateral for a loan. In bankruptcy, the lender will place a lien on the property and will be entitled to take ownership of the property if payments are not maintained. With unsecured debts, meaning those that are not linked to assets, creditors can sue the debtor for payment if the debtor defaults, or they can rely on debt collectors to collect the payments. A second mortgage is typically regarded as an unsecured debt, and the lien holder of the first mortgage has priority over other lien holders.
One possible way to get rid of a second mortgage involves a process called lien stripping. If a home is sold in foreclosure and the proceeds are less than the outstanding mortgage balance, the full amount will go to the first mortgage holder. This will leave nothing for second or third lien holders, making them unsecured debts. The homeowner may then file a motion in the bankruptcy court for the junior liens to be stripped, a process that will remove it from the debt list.
Although this process may seem overwhelming, no Arkansas homeowner needs to navigate the proceedings of a Chapter 13 bankruptcy alone. An experienced bankruptcy attorney can assess the client’s circumstances, and based upon that information, suitable options can be suggested. With the guidance and support of a lawyer, informed choices can be made that may resolve the issues in a manner that can protect the interests of the homeowner while also possibly presenting the opportunity to future financial stability.
Source: homeguides.sfgate.com, “Can I Keep My Home & Release Second Mortgage Debt Through Bankruptcy?“, Ben David Home, Accessed on Dec. 22, 2015