What are my options on my second mortgage?

I will start out with a very simple premise for my Chapter 7 and Chapter 13 clients, which I call the 10 word rule: If you want to keep your house, make the payments. (Same rule applies for cars). The 10 word rule covers 95% of what you need to know. The other 5% is where it starts getting complicated.

What we often see in today’s economy, is a situation where a person’s home has depreciated to the point where it is worth less than what they owe on their first mortgage. In that instance, we can do what is called a “lien strip,” where we can actually have your second mortgage lien removed from your house. Only do this in the Chapter 13, not in a Chapter 7. The law is not crystal clear on this in Minnesota, but I have had every lien strip that I have tried, go through, and get confirmed by a judge. In fact, I have become somewhat of an authority on this subject, having spoken to my fellow bankruptcy peers on this subject before the Bankruptcy Section of the Minnesota State Bar Association. Not everybody is a good candidate for a lien strip. There are several factors that I would consider, first and foremost being whether your first mortgage has decent enough terms, whether you want to make a long-term investment in your neighborhood, and whether you can actually afford a Chapter 13 plan payment if we get rid of your second mortgage payment.

Some of my Chapter 7 clients simply don’t pay their second mortgage. This is what we sometimes call an unofficial lien strip. In a chapter 7, your personal liability on your second mortgage gets discharged, although the lien does not. I would be happy to explain more of this to you as it may apply to your situation, and to send you a free two-page memorandum that I have written on this subject. Just call me at 763-421-0965.

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