It is possible only in a Chapter 13 to “strip” a second mortgage lien from your home. This will help to prevent foreclosure when a property’s market value has decreased substantially since the mortgages were obtained. Furthermore, the market value of the home must be equal to or less than the first mortgage. An appraisal of the property is necessary to make this determination and the appraisal will be filed with the motion to “strip the second mortgage” at the appropriate time.
An example of a situation where you can strip the second mortgage is as follows: A home or investment property has a first and second mortgage on it. If the appraised value of the property is $200,000.00 and the first mortgagee has a claim of $220,000.00 and the second mortgagee has a claim of $50,000.00, then the second mortgagee is totally unsecured and its lien can be stripped. This means that in the Chapter 13 Plan, the second mortgage will not be included in secured creditors to be paid their full monthly amount, but will be included with the unsecured creditors and only a portion of it will need to be paid over the life of the plan. Note that if any amount of the second mortgage is unsecured, it will not be able to be stripped.
When all payments have been made on the plan, then the case will be discharged including any unsecured debt which has not been paid and including the unsecured second mortgage. Upon entry of the debtor’s discharge, the mortgage lien will be deemed void and will be extinguished automatically without further court order.
However, if during the life of the Plan and prior to the debtor’s discharge, the debtor’s property goes into foreclosure brought by the first mortgagee, then the second mortgagee may assert any rights it may have as a defendant in a foreclosure proceeding. Therefore, the second mortgagee will have a claim to excess proceeds from a foreclosure sale, if any. If the foreclosure occurs after the plan has been completed and the case discharged, then the second mortgagee would not have a claim to the excess as the lien has been extinguished and any excess would belong to the debtor.