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Eliminate a Second Mortgage Lien – Second Mortgage Debt

For these purposes, a line of credit that is secured against real estate is a mortgage. There may be circumstances, that permits a debtor to eliminate a second and/or third mortgage. Presently, in New Jersey, a debtor may not eliminate a mortgage in connection with a Chapter 7 bankruptcy case. Typically, a debtor may be permitted to eliminate a second or third mortgage in a Chapter 13, if the debtor meets the necessary criteria.

Firstly, if both spouses are obligated to pay the note and mortgage, both spouses must be debtors in a Chapter 13 bankruptcy case, in order to eliminate the mortgages. Remember, bankruptcy only benefits the debtor that files. Therefore, if only one spouse that is obligated to pay the mortgage files for NJ bankruptcy protection, the mortgage is eliminated only with regard to that spouse and not to the non-filing spouse.

The critical issue as to whether the elimination of debt in NJ is availble to a debtor in regards to their mortgage is the fair market value of the house at the time of the bankruptcy filing as compared to the payoff on the prior mortgage(s). In other words, if the fair market value of the property of the real estate, at the time of the filing, is less than the payoff of the first mortgage, the debtor may possibly be permitted to “eliminate” any and all subsequent and subordinate mortgages. Please note that I included the term “eliminate” to provide a more easy understanding of the subject matter. Please see the explanation provided below.

There are two parts to a mortgage, one is the lien and the second is the balance due to the mortgage company. The lien will be eliminated, and removed from the property, if the debtor meets the above criteria regarding the value/payoff. Additionally, the court may require that the debtor completes the chapter 13 plan and makes all payments in compliance with the plan. It may be possible that a particular judge may not require the completion of the plan.

In the event that the value/payoff criteria is satisfied, the amount of the second or subsequent mortgage is reclassified from secured debt to general unsecured debt. Unsecured debt is the same classification as credit card debt. The bankruptcy laws dictate the amount of this debt that the debtor is required to pay, depending on the debtor’s financial position and circumstances. In the majority a cases, the debtor is either not required to pay any or only a small portion of this debt. This explanation is presented in a separate portion of this website.

An example of this analysis is as follows. If the fair market value of real estate at the time of the filing is $150,000, with a first mortgage payoff of $160,000 and a second mortgage payoff of $50,000, the debtor may “eliminate” the second mortgage because the fair market value of the real estate is less than the payoff of the first mortgage. Under this scenario, if there was a third mortgage, the debtor would also be permitted to “eliminate” the third mortgage. If the payoff of the second mortgage is $1 less than the fair market value of the real estate, the debtor will not be permitted to “eliminate” any portion of the second mortgage, whatsoever.

Contacting a Bankruptcy Attorney to Eliminate Your Mortgage Debt

If you are considering filing for bankruptcy protection in New Jersey and have a second or third mortgage, you may be able to eliminate that debt. Contact the experienced New Jersey bankruptcy attorneys at The Law Offices of Robert Manchel for guidance and straight answers. Robert Manchel knows the law and has been helping individuals file for bankruptcy protection for 18 years. Call us today at (866) 503-5655 for your free, confidential consultation.