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How to remove a second mortgage in bankruptcy

One useful feature of a Chapter 13 bankruptcy that not many borrowers know about is the ability to use a Chapter 13 to strip off a second mortgage or home equity loan on property that is now worth less than the outstanding balance on the first mortgage.

Perhaps that is because for decades, most real estate in the U.S. only escalated in value. Two or three generations had only witnessed appreciation for their homes, and the 1930s and the Great Depression were the last time there was a widespread crash in real estate values.

Or we should say, it had been. After 2008, that was no longer true, as millions of Americans and a great many in Tennessee watched as their home lost value, and many experienced the pain of seeing their home go "underwater," with a lower market value than what they owed on their mortgage.

If you have additional debt in the form of a second mortgage or home equity loan, you may be able to eliminate that debt in a Chapter 13, as has become unsecured, and can be discharged like credit card debt.

Of course, you need to complete your Chapter 13 plan, which your attorney can work with you to create and help you learn how it will function as a budget for your expenditures over the life of the plan.

The ability to strip second mortgages from property has traditionally been limited to Chapter 13s, but a case that will be heard by the U.S. Supreme Court will decide if in some cases it may apply in a Chapter 7 bankruptcy.

A bankruptcy attorney can answer any questions as to which bankruptcy chapter will would best for you financial situation.

Reuters.com, "U.S. top court to hear Bank of America cases on second mortgages," Lawrence Hurley, November 17, 2014

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