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Using Chapter 13 to strip a second mortgage

Many people in Kentucky use a Chapter 13 bankruptcy filing to protect their home from foreclosure. If you are earning a steady income, a Chapter 13 can help provide that "breathing space" to help you deal with other financial difficulties. It can allow you to repay mortgage arrears in a five-year Chapter 13 plan, and this can both stop a foreclosure proceeding and provide you with the time need to catch up with your mortgage payments.

However, a Chapter 13 can also permit you to eliminate other unsecured debts, like credit card debt and, in some cases, a second mortgage. It works like this. If your home value has declined to a point where your first mortgage is "underwater," and you owe more than you can sell the home for, your second mortgage is no longer secured by any equity in your home. 

This makes the second mortgage an unsecured debt, and you can strip it from your home. Assuming you complete your Chapter 13 and receive a discharge, you will no longer owe that debt.

By reducing or eliminating your unsecured debts and enabling you to make up your arrears, a completed Chapter 13 may leave you in a much better financial position. The freeing up of money you had been using to try to pay your credit cards can allow you better afford your mortgage and pay other necessary expenses.

Ask your bankruptcy attorney about the specifics of stripping a second mortgage from your home to determine if it is an option available for your situation. 

Source: Foxbusiness.com, "Should I Take Loan Modification While in Chapter 13?" Justin Harelik, July 24, 2013

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