If you are struggling with debt, you often take out multiple mortgages on your home. However, if your home is underwater and you file for Chapter 13 bankruptcy, you can get rid of junior mortgages. This can be done by lien stripping. The primary mortgage is a secured debt, while all secondary and subsequent mortgages are treated as unsecured debt. When you file for chapter 13 bankruptcy, you must pay your debts through a repayment plan. The priority of debts is secured debts, unsecured priority debts (alimony, child support, unpaid taxes), followed by unsecured debts (credit card debt, medical bills, personal loans, etc.)
The bankruptcy filer’s disposable income is used to finance the repayment plan. Secured debts like home loans or car payments need to be paid in full. If you wish to keep your property, you need to stay current on your payments. Chapter 13 also allows you to catch up on past due payments, which can be included in your repayment plan. The unsecured creditors are not required to be paid in full. Any disposable income left after paying secured and priority debts are left to pay your unsecured creditors. Any unsecured debt that remains after completing your repayment plan gets wiped off.
How to convert the junior mortgage into unsecured debt?
Any junior lien on secured debt is converted into unsecured debt. However, for that to occur, your house should be underwater, i.e., the house’s value should be less than what you owe for it. As a result, on selling the house, there will be no money left to pay for the junior mortgage, thereby making it completely unsecured. Once this is proved, the judge declares the junior loans as unsecured, and they are subsequently treated like that.
The other important criteria for getting rid of junior liens is that you must complete your repayment plan. This is to ensure that you acted in good faith and tried to pay your unsecured creditors as much as possible from your disposable income. Once the case is complete, the unsecured debts are discharged. However, if you miss any payment, the Court can dismiss your case, and the lien will exist.
If you file for Chapter 7 bankruptcy, you need to repay all your loans, including junior mortgages (even if your house is underwater), to keep your house. Thus, filing for Chapter 13 is a better option if you wish to keep your home. To know more about bankruptcy discharge in Los Angeles, call 888-297-6203.