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How to Deal with a Second Mortgage or HELOC – Try Avoiding it in a Chapter 13 Bankruptcy

With home values precipitously dropping over the past few years, many people find that their houses are underwater – owing more on the house than the house is actually worth.  Add to this the reality that many people are straddled with more than one mortgage with the addition of a second mortgage or a home-equity line of credit (HELOC).   What can the underwater homeowner do in this situation? Well, there may be some relief around the corner in the form of a Chapter 13 bankruptcy.

In a Chapter 13 bankruptcy, a second mortgage or HELOC may be avoided entirely.  In order to do this, the value of the property must be less than the principal balance of the primary mortgage, which renders the second mortgage or HELOC wholly unsecured.  For example, let’s say you have a house that is worth $195,000, and there is a primary mortgage of $210,000 and a HELOC of $55,000.  Based on this scenario, the value of the house ($195,000) is less than the principal balance of the primary mortgage ($210,000) rendering the HELOC ($55,000) wholly unsecured.  Under this fact pattern, the HELOC would be avoidable under a Chapter 13 bankruptcy.  However, if there is even $1 of equity left over for the HELOC, the HELOC would not be avoidable.

Now, how do you determine the value of a property in anticipation of avoiding a second lien in a Chapter 13 bankruptcy?  Start by obtaining a Comparative Market Analysis (CMA); many real estate agents will generate this document for free or for a small fee.  We will use this value for the house in our bankruptcy schedules.

It is important to note that this type of relief is only available in a Chapter 13 bankruptcy, not a Chapter 7 bankruptcy.

If you would like to find out more information regarding how second mortgages and HELOCs may be avoided in Chapter 13 bankruptcy, please feel free to call our office to set up a free consultation.

Tom Butcher, Attorney At Law

Tom Butcher is the owner and attorney at Butcher Law Office, LLC. He represents clients in financial distress in Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. Tom offers a friendly, respectful, and compassionate experience for clients who are in financial and legal distress. Rather than taking a mechanical approach to filing bankruptcy for clients, like other bankruptcy firms, Tom strives to offer a personal, one-on-one experience, where the client’s situation is of utmost importance. Tom believes this personal attention keeps him connected to the community, and serves his clients best during their bankruptcy.
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