Kentucky Bankruptcy Law

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Making a Second Mortgage Disappear

Well, I cannot actually make a second mortgage disappear, but I might be able to strip it off of your house and make it an unsecured debt instead of a secured debt. I mentioned this in my last post which you may want to look at if you are considering trying to save your house or let it go through foreclosure.

In a Chapter 13, one can “value” the amount of a secured debt under 11 USC Sect. 506. Essentially, when one files a Chapter 13 a secured debt is only secured up to the value of the property it is secured against. There are some exceptions which I will not go into. If you own a home and have a second mortgage, then that second mortgage might be completely underwater. That is, there is no equity left in order to secure the debt. If that is the case, it can be “stripped” off of the property and treated as an unsecured debt in its entirety.

However, if the lender can prove that there is even $1.00 worth of equity, the courts in the Sixth Circuit (such as Kentucky) will not strip the loan off; it has to be paid in full just like the primary loan. The rationale is that as one pays down the principal on the primary loan, more and more equity is realized to which that second loan can attach. So, they have made it an all or nothing sort of scenario.

July 23, 2013 Posted by | Bankruptcy, Chapter 13, Foreclosure, Plan, Security interests | , , , , , , , , , , | Leave a comment