If you have a second mortgage on your Connecticut home, you know that your second mortgage holder has the same right as your primary mortgage holder to foreclose on your home if you fail to make your required mortgage payments. What you may not realize, however, is that if you file for Chapter 13 bankruptcy in order to reorganize your debts, you may be able to prevent your second mortgage holder from exercising its foreclosure rights. As SFGate.com explains, such a procedure goes by the name of lien stripping.
Unlike a Chapter 7 bankruptcy that discharges your consumer debt but fails to protect your home, a Chapter 13 bankruptcy is a debt reorganization that gives you the opportunity, usually over a three- or five-year period, to get caught up on your debts. Not only does Chapter 13 save your home from foreclosure, in many cases it also can strip your second mortgage holder of the lien it has on your home.
Secured versus unsecured creditors
Chapter 13 does this by means of designating your second mortgage holder as an unsecured creditor rather than a secured one, especially if you have little or no equity in your home. Your unsecured creditors have few if any rights of recovery in a Chapter 13 bankruptcy.
The main hallmark of Chapter 13 bankruptcy is that you establish a court-approved payment plan to repay your debts over time, often at the reduced rates you negotiate with your secured creditors. Your unsecured creditors, on the other hand, are a separate creditor class. Once you successfully fulfill your payment plan obligations and therefore end your bankruptcy period, the court can discharge your unsecured debts and eliminate any liens associated therewith. In all likelihood, however, you will need to petition the court for lien stripping of your discharged unsecured debts.
Once you successfully strip your second mortgage lien, you can ask your lender to return to you the promissory note and/or property deed you gave it when you took out your second mortgage. You also can ask your lender to remove the lien strip from your credit history. Since some lenders are loath to comply with your requests, you may need help from a bankruptcy attorney to accomplish your goals.
This information is not legal advice, but it can help you understand lien stripping and what to expect.