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Chapter 13 bankruptcy may allow a second mortgage to be stripped

Wisconsin homeowners may be interested to learn that, under certain circumstances, the Bankruptcy Code provides the opportunity to actually discharge a second mortgage by filing for Chapter 13 bankruptcy. This is available to those who are able to meet the terms of the qualification process. Once a filer is approved, the court may change a second mortgage from secured to unsecured debt. In so doing, the debt may be discharged as part of the Chapter 13 bankruptcy process.

If the value of the house has dropped to a level that is lower than the outstanding balance on the first mortgage, an individual may qualify for having the lien on the second mortgage stripped. To achieve this, the homeowner must file for Chapter 13 bankruptcy under which ownership of the home can be maintained as long as the first mortgage payments remain current. One of the criteria for qualification for Chapter 13 is proof that the homeowner's income will cover obligations for secured debts, such as auto loans and the first mortgage, along with living expenses; there must also be additional funds to apply toward other debts.

In filing for bankruptcy, the homeowner must draft and submit a repayment plan for the court's approval. A separate motion must be filed with the court to get the second mortgage lien stripped. Upon approval of the motion, the second mortgage will be changed to an unsecured debt by the court. The holder of the second mortgage will be ordered to remove the lien from the property. Once the payment plan is approved, the payments must be made over a period of three to five years, and the court will order the amount to be paid to the second mortgage holder.

Upon completion of the payment plan, the court may discharge any remaining debt on the second mortgage. An experienced bankruptcy attorney can provide additional information related to the eligibility for a Chapter 13 bankruptcy filing, such as the requirement to complete a government-approved credit-counseling program prior to filing. With professional guidance and support, a Wisconsin homeowner can look forward to emerging from bankruptcy in a much improved financial disposition.

Source:, "How to Strip Off a Second Mortgage", Amber Keefer, Dec. 26, 2015

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