Will bankruptcy get rid of my second mortgage?
Under Section 506 of the United States Bankruptcy Code, a Chapter 13 debtor may make a motion before the respective bankruptcy court to avoid the 2nd mortgage and reclassify it from secured to unsecured so long as the 2nd mortgage, in light of the current property value, is fully unsecured.
For example, imagine property owner has an existing 1st mortgage with a principal balance of $500,000 and a 2nd mortgage with a principal balance of $100,000. Imagine too that given market conditions, the property is now valued at $450,000. Under this example, the 1st mortgage is secured up to $450,000 and unsecured in the amount of $50,000. As for the 2nd mortgage, there is absolutely nothing left. The 2nd mortgage is indeed fully unsecured. Hence, the 2nd mortgage can be avoided under a Chapter 13 bankruptcy.
No doubt, given the collapse of the housing market, this provision of the bankruptcy code has proven to be a powerful tool in the hands of consumer bankruptcy attorneys in their effort to obtain financial relief for consumer debtors.
No comments:
Post a Comment