Mortgage Stripping and Liens Process in New Jersey
Guidance from Bankruptcy Lawyers in NJ
In today’s economy, many second and third mortgages are worthless because the value of the house has decreased due to the bad economy. However, there is a bankruptcy remedy in New Jersey that allows debtors to strip second mortgages and other liens from the debtor’s obligations. The remedy is available in a Chapter 13 bankruptcy.
What is a First Mortgage?
When consumers buy a house in NJ, they have to pay for it. If they can’t pay cash, they enter into an agreement/loan to pay the money back. To protect their interest, the creditor also demands that the debtor give the creditor a security interest in the property so that if the debtor can’t pay the loan, the debtor can repossess the property, sell it and get their money. The security interest is a mortgage. Many times, the amount of the initial (first) mortgage is less than the value of the house because the consumer/debtor pays a down-payment.
What is a Second Mortgage?
The equity in the home is the fair market value of the house minus the amount of the mortgages/loan agreements. For example, a $200,000 home with a $150,000 mortgage has $50,000 (200,000 -150,000) equity. Often, the debtor will take a second or third mortgage, if there is enough equity in the home, to get more cash or to pay for home improvements. In the example, the debtor could borrow up to $50,000 – the amount of the equity.
What is the Underwater Crisis?
In the last decade, the economy caused the values of many homes to decrease. Across the country, including in New Jersey, the decreased home values means the amount of the second and third mortgages are more than the value of the house.
If the value of the house is less than the value of the primary mortgage, then there is no value in the second and third mortgages. If the property is sold, the holders of these second and third mortgages will get nothing. The name for this situation (the home value is less than the first mortgage) is “underwater”. The second and third mortgages are underwater. This underwater crisis affects millions of homeowners.
How Chapter 13 Can Strip/Get Rid of the Later Mortgages and Liens
Chapter 13 bankruptcy laws allow for the stripping of the security interest part of the second and subsequent mortgages. The main goal of Chapter 13 is to allow debtors to reorganize their security interests so they can keep their secured property.
In a Chapter 13 reorganization:
- Security interests are protected fully by letting the debtor pay the arrears over an extended time (3 to 5 years)
- Unsecured debts are reorganized by paying a small percentage of the unsecured debts over the same extended time (3 to 5 years)
Chapter 13 allows the debtor to strip the second and later mortgage holders of their secured status because they are worthless. The later mortgages (the second and third mortgages) convert to unsecured debts (think credit cards and medical bills). These claims are then paid the percentage that unsecured creditors get. All unsecured debts discharge at the end of the extended 3-5 year time period. Stripping the latter mortgage is a valuable way to save your home from foreclosure.
Example of Lien Stripping with Chapter 13 Bankruptcy
A house is purchased for $300,000 with a $200,000 first mortgage. The buyer later gets a second mortgage for $90,000 because there was $100,000 equity in the house ($300,000 – $200,000). The value of the property then drops to $200,000 (from $300,000) because of the recession. The second mortgage is now worthless since the value of the house is just $200,000 and the homeowner still owes $200,000 on the first mortgage. There’s nothing left to pay the second mortgage.
If you file a Chapter 13 bankruptcy, your plan will pay the first mortgage ($200,000) plus any arrears on the first mortgage. If your monthly payments were $900 a month and you are $6,000 in arrears when you filed your Chapter 13, then you pay $1000 a month for 5 years. $900 is still your main payment. $6,000 divided by 60 months (5 years) is $100 a month. $900 plus $100 equals $1,000.
The second mortgage will be stripped (converted to an unsecured debt) and you will just pay a percentage (the same percentage as any other unsecured debts). If the percentage you pay in the Chapter 13 plan is ten percent for credit cards for 5 years, you will just pay ten percent of the second mortgage. So instead of paying the full amount of the second mortgage ($90,000) you just pay $9,000 (ten percent of $90,000) over 5 years or $150 a month. After a discharge, you do not owe any more on the second mortgage. When you finish paying the first mortgage, you will own your home free and clear.
Contact Bankruptcy Lawyers in NJ to Learn if You Qualify for Lien Stripping in Ch 13
Are your mortgages and liens worth more than the value of your house? Are you considering a Chapter 13 bankruptcy to keep your house? Contact Garland & Mason, L.L.C. today to start your journey toward financial freedom. Our bankruptcy lawyers in NJ explain the bankruptcy process. Additionally, we offer a free initial consultation. Our office is handicap-accessible. It is conveniently located just fifteen minutes from the New Jersey Turnpike and the Garden State Parkway. Parking is free. Call us at (732) 358-2028.