Can Bankruptcy Cancel a Mortgage?

C. Scott Kirk Law Firm

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Can a bankruptcy remove, cancel, or void my mortgage? The answer to this question is maybe. The bankruptcy code protects mortgages on a primary residence, but under certain circumstances, the code allows removal of a mortgage. Chapter 13 and chapter 11 allows a person to void or “strip” off a mortgage on a primary residence if certain criteria are met.

Requirements to Strip a Mortgage

1. The mortgage is not the first mortgage on the property. Typically, mortgages that can be stripped are equity lines, second mortgages, or a line of credit.

2. There is no equity in the property. After deducting all senior liens from the property, there is no equity to secure the junior lien.

3. The plan is completed.

This relief only applies to those who file a chapter 13 or chapter 11, and only applies to mortgages that are not the first mortgage. The bankruptcy code prevents any modification of the first mortgage on your property. The code does allow stripping of junior mortgages only if there is no equity to secure the mortgage. For example, if your home is worth $100,000, you have a first mortgage of $105,000 owed on the property and a second mortgage of $15,000 owed on the property; the bankruptcy code will allow you to strip off the second mortgage in its entirety. The second mortgage is removed upon completion of the plan.

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Not all homeowners with multiple mortgages who file for chapter 13 or chapter 11 can qualify for this relief. There must be no equity securing the mortgage. For example, your home is worth $100,000; you have a first mortgage of $99,000 owed on the property, and a second mortgage of $15,000 owed on the property. In this scenario, the second mortgage cannot be stripped. After deducting the first mortgage from the property, there is $1,000 of equity to secure the second mortgage. The second mortgage will remain intact and owed the full balance. The Supreme Court of the United States has ruled that if there is one penny of equity securing a second mortgage, the mortgage cannot be stripped or modified.

The bankruptcy code can provide a homeowner relief from a second mortgage. Before filing, the homeowner should have a good understanding of the value of their home. Familiarize yourself with recent sales or similar-sized home sales in your neighborhood.

To see if you qualify for this relief and discuss your options, you may contact C. Scott Kirk of C. Scott Kirk, Attorney at Law, PLLC at 252-689-6249 or scott@csklawoffice.com. Please visit csklawoffice.com. C. Scott Kirk, Attorney at Law, PLLC proudly serves clients in Greenville and throughout Eastern North Carolina.