A bankruptcy debtor may possibly eliminate a second and subsequent mortgage, while keeping their house, under certain circumstances. In the district of New Jersey, this may be accomplished in a chapter 13, not a chapter 7.
The main criteria is that the fair market value of the real estate is less than the prior mortgage payoff. See the following example:
real estate value is $100,000.00;
first mortgage payoff is $120,000.00;
second mortgage payoff is $40,000.00;
third mortgage payoff is $10,000.00.
Under this scenario, the homeowners will be able to strip off the second and third mortgage liens from the property, as the second and third mortgages are “under water”.
What happens to the mortgage debt? The mortgage debt is reclassified as unsecured debt, which is the same classification as credit card debt. The amount that must be paid towards the unsecured debt depends on numerous criteria. Typically, chapter 13 debtors pay only a portion of their total unsecured debt, pro rata.
Typically, the mortgages are not stripped away and completely eliminated until the debtors complete all of their required chapter 13 monthly payments and are granted a discharge.
Attorney Robert Manchel can be contacted at (866) 503-5655 to answer your questions regarding bankruptcy protection.