In you are like many Illinois homeowners, your debts have gotten so out of hand that you cannot pay them and you fear losing your home to foreclosure. But what if you could strip the lien from your home that your second mortgage represents? As Home Guides explains, that may be exactly what you can do by means of a Chapter 13 bankruptcy.
Unlike a Chapter 7 bankruptcy that discharges virtually all of your consumer debt, a Chapter 13 bankruptcy is a reorganization whereby you can renegotiate the terms and payment amounts of many of your debts, including your first mortgage. Once you file Chapter 13 bankruptcy, you have approximately 120 days during which you must come up with a plan to repay your debts over an extended period of time, usually three to five years. Your creditors cannot hound you for debt payments during your bankruptcy period, nor can your mortgage lender foreclose on your home.
Secured versus unsecured creditors
One of the things the bankruptcy court does when you file for Chapter 13 is to divide your creditors into those who are secured and those who are not. In other words, your secured creditors represent the ones to whom you provided collateral for your loans; you provided no collateral to your unsecured creditors.
While your primary mortgage lender falls into the secured category, your secondary mortgage lender falls into the unsecured category, especially if you have little or no equity in your home. As such, your Chapter 13 bankruptcy puts your second mortgage lender in the position of having virtually no chance that you will pay much, if any, of your second mortgage debt. In fact, the bankruptcy court can strip any lien your second mortgage lender holds or claims to hold on your home.
Working your repayment plan
Once the court approves your repayment plan, which likely will not include any of your unsecured creditors, you proceed to live a normal life, making the monthly payments to your secured creditors that your plan calls for. Due to the lengthy Chapter 13 bankruptcy period, this gives you a chance to catch up on any first mortgage payments you may have missed. Since your renegotiation with your first mortgage lender may well have reduced your monthly payments, it also gives you a chance to substantially reduce the remaining balance of your first mortgage.
When your bankruptcy ends, the court discharges all of your unsecured debts not covered in your repayment plan. Your second mortgage lender consequently goes away empty handed with no enforceable lien on your home.
While this information is not legal advice, it can help you understand the lien stripping process and what to expect.