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Use Chapter 13 To Eliminate A Second Mortgage or Home Equity Line of Credit


In a Chapter 13 bankruptcy you may be able to eliminate your second mortgage or home equity line of credit (HELOC). This option exists for homeowners facing bankruptcy in California where many homes values are still “upside down” and property values are “underwater.” This might apply to you if you are considering bankruptcy to deal with a pending mortgage default or foreclosure.

Called “Lien Stripping,” the process of removing a HELOC or other lien on your property is one of the tools that could be a game-changer for your financial situation. In order to remove a second mortgage or HELOC, your situation must meet certain legal requirements. For example, the value of your home must have depreciated to the point where it is worth less than what you owe on your first mortgage. You must also meet other eligibility requirements for bankruptcy.

Here’s a simple example that might allow for the removal of a HELOC in Chapter 13. If you owe $500,000 on your first mortgage and your home is worth less than $500,000, then you might be able to “strip” or remove the HELOC in the second mortgage position. But it the value of your home is more than the amount you owe on your first mortgage, you will not be able to remove the HELOC. Either way, Chapter 13 is a financial option that may help you take a closer look at ways that you can afford to stay in your current home.

A Chapter 13 bankruptcy is not a quick process and it requires discipline on your part to make it happen. If your first mortgage is in default, you will have to commit to a plan to pay back the defaulted amounts over a period of time. Yet Chapter 13 offers many financial tools that Chapter 7 bankruptcy does not. These tools could make it more financially more appealing to stay in a home that is currently upside down.

Bayer, Wishman & Leotta is a full service bankruptcy firm. We have offices in Downtown Los Angeles, the San Fernando Valley and Long Beach. Our attorneys are Certified Specialists in consumer and small business bankruptcy and you may reach us at (800) 477-3111.


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