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Mortgage liens and bankruptcy

A New Jersey homeowner who is facing difficulties in managing finances might evaluate the possibility of bankruptcy for curbing problems related to debt collection. Although this could provide a new start in one's finances, there may be an interest in keeping a home. A second mortgage creates a lien against the title, and there may be questions as to whether a second mortgage be discharged during the bankruptcy.

If Chapter 7 bankruptcy is filed, a second mortgage cannot be stripped, but in Chapter 13, it is possible to remove the lien under certain circumstances. A second mortgage continues to be a secured debt during Chapter 7, but it is normally converted to an unsecured status in Chapter 13 if the home has little or no equity. However, Chapter 13 will not eliminate a lien if the debt is considered secured.

In Chapter 13, debt is reorganized for a period of between three and five years. The debt discharge occurs at the end of this period. Upon completion of the bankruptcy, the lien related to the second mortgage can be stripped. To facilitate the action, the individual who has gone through Chapter 13 must submit an application to the bankruptcy court. It is also possible to have an attorney handle these issues to minimize the stress of having to interact with creditors.

An individual who is unsure of how to proceed may want to meet with a bankruptcy attorney to discuss issues such as keeping a home. An attorney may be able to provide representation in hearings with the courts and with creditors and could provide advice and information throughout proceedings.

Source: SF Gate, "How to Strip Away a Second Mortgage Through a Bankruptcy", Tony Guerra, December 05, 2014

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