Taking out a second mortgage may have seemed like a reasonable financial solution at the time, but as your debt level has risen, it may now represent an unmanageable burden. Bankruptcy may offer you an opportunity to eliminate your second mortgage through a process called lien stripping.

However, filing for bankruptcy does not automatically qualify you for lien stripping. There are requirements that you must meet to be eligible for elimination of your second mortgage.

Chapter 13

A handful of states allow filers to strip a second mortgage when filing Chapter 7 bankruptcy: Georgia, Florida and Alabama. However, in Mississippi, Tennessee and all other states, you can only eliminate a second mortgage when you file Chapter 13. You may qualify for Chapter 13 if you have a regular income, but your debt level is now beyond your control.

Home value
You can only eliminate a second mortgage through Chapter 13 bankruptcy if the current value of your home is less than what you still owe on the first mortgage. If this is the case, it means that your second mortgage represents unsecured debt, similar to medical bills or a credit card balance. Chapter 13 bankruptcy involves reorganizing your unsecured debt so that you pay it off gradually by making monthly payments over a period ranging from three to five years.

Lien stripping is only available if the value of your home has dropped since you took out the second mortgage. If you still have equity in your home, you cannot eliminate your second mortgage through bankruptcy because it does not qualify as an unsecured debt.

In addition to these requirements that pertain specifically to lien stripping, you must undergo credit counseling within 180 days before filing for bankruptcy. This is a requirement imposed by the Federal Trade Commission and, with a few exceptions, applies to all Chapter 7 and Chapter 13 bankruptcy filings.

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