One of the primary benefits of the bankruptcy process, in particular Chapters 11 and 13, are the ability to "strip-off" mortgages on a primary residence or second property. Chapter 13, when available, is simpler and usually more cost-effective. However, to strip-off a second lien in Chapter 13, it is an all-or nothing proposition. What may be an "all" proposition in 2012 and early 2013 may very well be a "nothing" proposition in late 2013.
Why? Rising home prices in the Bay Area.
Simply put, if it can be demonstrated that the house is worth less than the balance of the first mortgage, the second loan can be "stripped off" in a Chapter 13 bankruptcy proceeding. If, however, the house is a primary residence and its value can be demonstrated to be higher than the balance on the first mortgage, the lien strip is simply not available.
According to DataQuick, California real estate prices rose 17 to 18% in San Jose and San Francisco over the last year. Economists are predicting modest gains in housing prices next year across the U.S., and stronger gains in the Bay Area. Many home buyers whose homes were "underwater on the first mortgage" will become "underwater on the second mortgage only." Those underwater on the second only can't "strip off" liens - i.e. emerge from a Chapter 13 bankruptcy with only one mortgage.
Accordingly, if your house is arguably worth less than the balance on the first mortgage, and you have a second mortgage, you should act now and investigate your ability to strip the second mortgage in Chapter 13 before it is too late.
If you would like a free consultation about lien stripping in Chapter 13, please call us at 650.259.9200 in Burlingame or 408.520.9301 in Campbell.
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Law Office of Jason Honaker