One of the commonly known facts about bankruptcy is that in general you cannot modify a mortgage secured by your principal residence. This means that if you have an adjustable rate mortgage and the rate is going from 5% to 13% and your payment is going from $1500 to $2500, you generally can't change that by filing a bankruptcy. However, there is one option that has been irrelevant for the last several years due to the hot real estate market.
If a junior mortgage is wholly unsecured, i.e., there is no equity for that mortgage, the wholly unsecured mortgage may be stripped off and treated as an unsecured claim. Thus, if a house has a value of $200,000 and there are two deeds of trust, one on which there is $205,000 owing and one on which there is $40,000 owing. The second deed of trust with $40,000 owing could be stripped off and treated as an unsecured claim. In a Chapter 13 plan, this might mean that the $40,000 deed of trust could get nothing if the plan pays 0% to unsecured creditors.
With real estate values rising by 25% a year in the first five years of this decade, there were no opportunities to strip off mortgages, because all mortgages were at least partially secured. With some of the risky lending practices that were being used (100% financing and even 125% financing), however, that is changing now. A house that was 100% financed with two mortgages (80% and 20%) might be worth 80% of what it was worth when it was financed. Thus, the 20% mortgage might be stripped off and treated as unsecured.
This is an important right for debtors to consider in deciding whether they will be able to keep their home.
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Desperate for bankruptcy information I can trust. Have consulted several bankruptcy attorneys by phone & in person. Don't want to make any more trips to Fresno for another consultation. Problem is that I have a hard time understanding the information I receive. I make notes as attorneys give me information, but by the time I get home or off the phone, I don't remember what it means. Have made contact with only one attorney who says he can help me with my particular situation. But all others say there is no solution, period. When attorney who says he can help, and I tell him that all others dispute his advise, he asks me what they say. I can't tell him, because I've forgotten. Desperately need statement in writing as to why a chapter 13 won't help so I can reiterate to the attorney who says it would help. Please contact if willing to "try" to explain to me on phone and MOST IMPORTANTLY put in writing so I can remember & read to this attorney. I don't know who is giving me accurate advice & running out of time. Would be happy to pay for written opinion.
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