Florida homeowners are all too familiar with the destruction left in the wake of the housing market collapse – especially in the condo market. Almost overnight, homeowners saw the equity in their homes drop by thousands of dollars.
During the housing market boom, many homeowners took out second mortgages and home equity loans believing it was a safe bet given that their homes were increasing in value by leaps and bounds.
Tragically, following the bust many homeowners discovered that not only had their homes dropped in value, but they were actually “underwater” on their mortgages – meaning the current value of their homes were actually less than what the homeowners still owed on their mortgages.
Fortunately for homeowners, there are options available for those who overextended themselves when they took out second mortgages on property now devalued. For instance, homeowners struggling with mortgage payments can use bankruptcy to “strip” liens and thus eliminate second mortgages and home equity loans.
Lien stripping under Chapter 13 bankruptcy
Generally, Florida homeowners will be able to take advantage of lien stripping when they file for a Chapter 13 bankruptcy and their home is underwater. Basically, the idea is that when a home is valued less than the outstanding mortgage balance, the holder of the second mortgage will no longer be a secured creditor since the home is no longer valued high enough to serve as a security interest.
Consequently, the second mortgage can be stripped and ultimately eliminated. The second mortgage lender will only be entitled to the same pro rata share that all unsecured creditors receive.
For instance, imagine a Florida homeowner who still has an outstanding mortgage balance of $400,000 even though the housing market bust has decreased the market value in their home to only $300,000. Unfortunately for this homeowner, they took out a second mortgage on their property for $75,000 at the height of the housing market a few years earlier. But, because the homeowner is underwater by $100,000 on their first mortgage, the second $75,000 mortgage can be “stripped” during a Chapter 13 bankruptcy since it is now unsecured.
Eliminating a second mortgage during a bankruptcy can be a complex matter – with even slight factual variations easily altering possible options – thus this article should not be considered legal advice. However, if you are an underwater Florida homeowner with a second, or even third, mortgage, contact an experienced bankruptcy attorney to learn what options may be available to you.