Many of my clients who first come in to see me have been struggling with their debt for some time. Some for half a decade or longer. When I have a client who has a second mortgage on their home from back in the days when property values were rising each year, most of the time that second mortgage is no longer secured by equity in the property. In other words, their first mortgage is for more than the entire property is currently worth. Some clients ask if something can be done about that and some aren’t even aware that anything could ever help in that situation.
When this situation presents itself however, we do have tools at our disposal to deal with it. Historically, at least for those who reside in the Northern District of Alabama, Chapter 13 bankruptcy has allowed these underwater homeowners the ability to “strip off” these wholly unsecured second mortgages. Unlike the first mortgage of your primary residence, which is specially protected from modification under the Bankruptcy Code, a second mortgage meeting this requirement can be modified.
So what does this mean for you? It means that through a Chapter 13 bankruptcy, that second mortgage under these particular circumstances can be stripped of its secured status, and paid back at the same rate as your other unsecured creditors. And if your case turns out as a typical repayment plan, this means that a second mortgage amounting to tens or even hundreds of thousands of dollars will instead share from the few thousand dollars, or possibly less, that your medical bills and credit cards will receive. This action alone could save you hundreds or possibly thousands of dollars each month.
While there historically has not been this ability to “strip off” a wholly unsecured second mortgage in a Chapter 7 bankruptcy, recent case law here in the 11th Circuit (the federal court jurisdiction comprising the states of Alabama, Georgia, and Florida) has opened up the possibility of allowing it there as well. While this is a new and unsettled area of law here in West Alabama, it is an option that can be explored on a case by case basis for the time being.
Overall, this tool is a very complicated area of bankruptcy law and it is not open to everybody’s situation. But it is one of the most powerful and consequential tools available to homeowners facing serious financial circumstances. If you believe that your home may fall into this category, call to schedule a free consultation today at 205-286-8111 to discuss your situation with an experienced Tuscaloosa bankruptcy attorney.