Avoid Foreclosure in Atlanta, Georgia by Wiping out Your Second Mortgage in Chapter 13 Bankruptcy

Foreclosures in Atlanta, Georgia have caused property values in the Atlanta metro area to decline but homeowners may avoid foreclosure and increase home values by filing Chapter 13 bankruptcy. Most homes in the Atlanta and in other metro areas such as Alpharetta, Jonesboro, and Decatur have declined in value over the past four years. This problem is compounded by the fact that many houses are secured by second mortgages or home equity lines of credits that homeowners are unable to afford. Even if homeowners are able to sell the property for a price high enough to cover the first mortgage, the prospect of recovering enough sales proceeds to pay the second mortgage is low. Homeowners who have first and second mortgages and are facing foreclosure may even remain liable for the second mortgage debt even after the property is foreclosed.

Atlanta, Georgia homeowners can file Chapter 13 in order to stop paying their second mortgages and completely wipe out liability on the second mortgage liens. Through a process known as lien stripping, bankruptcy changes the status of a second mortgage company from a secured creditor to an unsecured creditor and forces the second mortgage company to cancel the security lien on the property upon the final discharge of a Chapter 13 case. Under Bankruptcy Code Section 506 (a) and (d), an attorney can ask the bankruptcy court to reclassify a secured second mortgage or line of credit as an unsecured debt, thus stripping the lien. Once a debt is classified as unsecured, between 0% and 100% of the debt is paid as an unsecured claim. At the end of the Chapter 13, the court issues an order canceling the second mortgage lien. During the pendency of the Chapter 13 case, the debtor does not have to make the monthly second mortgage payment!

Seem like magic? It actually makes a lot of sense. The key is that a mortgage is a debt that is secured by a tangible piece of property. The holder of the first mortgage has the right to the first bite of the tangible property meaning that because they were first, the debt that they are due must be completely satisfied before the second mortgage holder can move in and be compensated. Because the property is underwater, that first mortgage holder would not be fully satisfied in the event that the property was sold. Therefore, the second mortgage holder would not have a right to any portion of the amount gained by the sale. In the case of an underwater property, the second mortgage is de facto unsecured. The court acknowledges this by stripping the lien and reclassifying the mortgage as an unsecured debt. The key to a successful lien stripping is that the second mortgage must be completely unsecured, meaning that the fair market value of the property must be less than the balance of the first mortgage.

If your home is underwater and you have taken out a second mortgage, bankruptcy can help. Please consult an experienced bankruptcy attorney in Atlanta, Georgia. For a free initial consultation please contact the Law Offices of Charles Clapp at 404.585.0040.