Can you really eliminate a 2nd Mortgage in Chapter 13 Bankruptcy

The answer is YES! In a Chapter 13 bankruptcy under federal law 11 USC §506 (a) allows your second mortgage to be stripped off your property and be treated as unsecured debt. Section 506(a) can only be applied to remove a second mortgage off your home if the value of your home is at or below the outstanding balance on your first mortgage. Another word, the 2^nd or 3^rd mortgage must be underwater. In California cities where the housing market really took off many homeowners took out 2^nd mortgages to purchase properties, do home improvements, and pay off their credit card debt. Many Californians purchased and refinanced homes with inflated values and used 80/20 loans to finance them. In Riverside, San Diego, Los Angeles and Orange Counties the majority of 2^nd mortgages are now unsecured. “This is a perfect opportunity to strip 2^nd mortgage liens and help these people get back on track” says James Zhou, Bankruptcy attorney and senior partner at the Law Offices of Zhou & Chini.

• For example, you have a house that use to be worth $750,000, and is now worth $500,000 and there are two outstanding mortgages in the amount of $550,000 (1st mortgage) and $100,000 (2nd mortgage), then section 506(a) can be applied. In this scenario the value of your home is $500,000 being less first mortgage, which would allow you to strip off the second mortgage. In this situation, your second mortgage is completely unsecured.

During the term (typically 5 years) of your Chapter 13 plan your 2^nd mortgage will be treated as unsecured debt, and will be repaid the same percentage as the rest of your unsecured creditors. In a chapter 13bankruptcy your arrearages on your 1^st mortgage must be repaid before any of your unsecured debt. A 2^nd lien that’s underwater will be treated just like credit card or medical debt.

In order to remove your second mortgage off your property you file a lien stripping motion with the court (11 USC §506 (a)). Most courts require that you file a lien stripping motion that will allow you to obtain a court order approving the removal of your second mortgage. Once your lien stripping motion is approved, your second mortgage will be treated as unsecured debt in your Chapter 13 bankruptcy case.

Your Chapter 13 plan must be completed in order to remove your 2^nd mortgage. If your Chapter 13 bankruptcy case is dismissed or converted to a chapter 7 then the lien from your second mortgage will not be removed.

We have a Sample Lien Stripping Motion below for your review.
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
RIVERSIDE DIVISION
In re:
NAME OF DEBTORS
Debtor(s).
Debtor(s)
NAME OF DEBTORS
Movants,
v.
SECOND TRUST DEED
Respondent

Case No.:
NOTICE OF HEARING AND MOTION FOR
ORDER TO AVOID LIEN OF SECOND
TRUSTEE DEED HOLDER (NAME )
DATE:
TIME:
CTRM:
TO HE HONORABLE (NAME OF JUDGE), (NAME OF TRUSTEE), CHAPTER 13
TRUSTEE, (SECOND TRUSTEE DEED HOLDER)., and all other interested parties:
NOTICE IS HEREBY GIVEN that on (DATE OF HEARING) at (TIME OF
HEARING), (LOCATION OF HEARING), debtors (NAME OF DEBTORS), will move this court for an order avoiding the lien of second trust deed holder (NAME)., from debtors’ real estate located at (ADDRESS OF PROPERTY), under 11 U.S.C. Section 506(a), on the basis that the said lien is wholly unsecured.

Pursuant to Local Bankruptcy Rule 9013-1(f) any opposition to this Motion must be filed and served on debtors and debtors’ counsel no later than fourteen (14) days prior to the above hearing date. Failure to file a timely response to this Motion may result in a waiver of your right to oppose the Motion and the Court may grant the requested relief without further notice to you. The Court has jurisdiction to hear this matter pursuant to 28 U.S.C. Sections 157 and 1334. (NAME OF DEBTORS), the debtors in this Chapter 13 case, are interested parties and have standing to bring this Motion. FACTS
this case was commenced by the filing of a voluntary petition under Chapter 13 of the Bankruptcy Code (11 U.S.C.) on (DATE). At that time, debtors owned [and resided in] the real property located at (ADDRESS OF PROPERTY). The legal description of the real property is (LEGAL DESCRIPTION OF PROPERTY), in the (CITY, COUNTY, AND STATE) and Assessor’s parcel number (PARCEL NUMBER). The fair market value of the property as of the time the petition was filed was (FAIR MARKET VALUE) (See Debtors Declaration, attached hereto as Exhibit 1 and incorporated by reference). The property secured two loans. The first loan is secured by a trust deed held by (FIRST TRUST DEED HOLDER) in the amount of (OUTSTANDING LOAN) (See Schedule D and A, and Monthly Billing Statement for account number (ACCOUNT NUMBER) attached hereto as Exhibits 2 and 3, respectively, and incorporated herein by reference). The second loan is secured by a trust deed held by (SECOND TRUST DEED HOLDER), in the amount of (OUTSTANDING LOAN) (See Monthly Billing Statement for account number (ACCOUNT NUMBER), attached hereto as Exhibit 4, and incorporated herein by reference.

ARGUMENT Section 506(a) of the U.S. Bankruptcy Code provides that a secured claim is secured only to the extent of the value of the collateral, and unallowed secured claims are void. This section has generated much controversy in Chapter 13 cases because 11 U.S.C. Section 1322(b)(2), which prohibits a modification of the rights of holders of claims secured only by the debtor’s principal residence. However, the Ninth Circuit Bankruptcy Appellate Panel held in Lam v. Investors Thrift (In re Lam), 211 B.R. 36 (9th Cir. B.A.P. 1997), that the protection of section 1322(b)(2) does not apply to holders of totally unsecured claims. This was upheld in Zimmer v. PSB Lending Corp. (In re Zimmer), 313 F.3d 1220 (9th Cir. 2002).Thus, if a debtor can demonstrate that the value of his principal residence is less than senior liens, a junior lien will be determined to be wholly unsecured and thus subject to being avoided.

In this case, the value of the debtors’ residence is (FAIR MARKET VALUE). (See Exhibit 1). The first lien against the property is (OUTSTANDING LOAN), an amount that is more than the value of the property. The second lien of (SECOND TRUST DEED HOLDER) is thus wholly unsecured and can be avoided or “stripped”.

Based on the foregoing, debtors (DEBTORS NAMES), request an order of this Court as follows:. That the lien of Respondent (SECOND TRUST DEED HOLDER). For (OUTSTANDING LOAN-SECOND TRUST DEED), secured by debtors’ real property located at (ADDRESS OF PROPERTY), be determined to be completely unsecured and void; and 2. That any corresponding proof of claim filed by (SECOND TRUST DEED HOLDER) for the second lien of (OUTSTANDING LOAN), be deemed a general unsecured claim with debtors’ Chapter 13 plan; and 3. Should this case be dismissed or converted to any other chapter under Title 11 prior to the completion of the plan and entry of discharge, said lien will remain a valid encumbrance against the real property absent further order of this Court; and 4. For other relief as the Court deems proper.
Dated:
(ATTORNEY NAME)
Attorney for Debtors

The California real estate market has certainly been hit hard, and many homeowners took out 2^nd mortgages and HELOC’s to pay off credit card debt and do home improvements. The need for a highly qualified bankruptcy attorney is growing daily as more homeowners in California are facing foreclosure and lenders are denying loan modifications. When a bankruptcy attorney files a chapter 13 bankruptcy with a lien strip motion it will give someone the opportunity save their home from foreclosure and eliminate their 2^nd mortgage as well. To see if you qualify for this motion or to just receive free legal advice from an experienced bankruptcy attorney call the Law Offices of Zhou & Chini today at (888) 483-2902