Stripping Second Mortgages In New Jersey Through Bankruptcy
For years, New Jersey homeowners enjoyed a housing market in which they saw consistent increases in value of their homes – sometimes realizing double-digit percentage increases in a single year. For many, they believed this booming market would never end, prompting countless New Jersey homeowners to take out home equity loans and second mortgages.
Unfortunately, the housing bust of recent years brought that prosperity to a screeching halt. As a result of this housing market collapse, many New Jersey homeowners now find themselves “underwater” on their mortgages – meaning their outstanding mortgage now exceeds the current value of their home. For these desperate homeowners struggling to get by, there may be a bankruptcy option known as lien stripping which can
eliminate second mortgages or home equity loans.
Chapter 13 Lien Stripping
Lien stripping is available in New Jersey when a homeowner is underwater on their mortgage and they file for Chapter 13 bankruptcy. When the home is worth less than the outstanding mortgage, the second mortgage holder will not be considered a secured creditor because the home is no longer valuable enough to serve as the security interest – thus making the
second mortgage unsecured and able to be “stripped.” In these situations, the second mortgage is effectively eliminated and the lender of the second mortgage will only receive the same pro rata share that all other unsecured creditors receive.
For example, say a homeowner in New Jersey has a primary residence that is now valued at $500,000, even though the first mortgage on the property still has an outstanding principal of $600,000 – meaning the homeowner is $100,000 underwater on their mortgage. Further assume the same homeowner took out a second mortgage on the property at the height of the housing market that still has an outstanding principal of $100,000. Because there is no equity remaining in the first mortgage since the home is underwater, the second mortgage could be stripped in a Chapter 13 bankruptcy since it is now considered unsecured.
Conversely, if the home is worth $700,000 instead of $500,000 (no longer underwater), the second mortgage would not be able to be stripped since $600,000 is securing the first mortgage, leaving the remaining $100,000 to secure the second mortgage.
As is evident from this article, lien stripping law can be quite complex and difficult to navigate. If your home is currently underwater and you are having difficulty paying a second mortgage, an experienced New Jersey bankruptcy attorney can advise you as to your rights and options.