In Arizona, like in many other states, dismissing a second mortgage on a house when you have equity is challenging and often not possible through bankruptcy alone. Here are the primary reasons why you can’t typically dismiss a second mortgage in such a situation.
Secured Debt vs. Unsecured Debt
In bankruptcy, debts are categorized as either secured or unsecured. A second mortgage is a type of secured debt because it is backed by the collateral, which is your house. The lender has a legal claim on your property until the debt is paid off. When you have equity in your home, it means that the value of your home exceeds the amount owed on the first mortgage. In bankruptcy, you generally cannot dismiss secured debts and keep the property unless you surrender the collateral (in this case, your house).
Chapter 13 Bankruptcy
In some cases, individuals may explore Chapter 13 bankruptcy as a way to address second mortgages. Chapter 13 allows for a process called “lien stripping” if certain conditions are met. Lien stripping can potentially remove a second mortgage and treat it as an unsecured debt if the value of the property is less than the balance of the first mortgage. However, this option is not available if you have equity in the property.
Equity & Exemptions
Arizona has specific bankruptcy exemptions that allow you to protect certain property, including a portion of your home equity. If you have significant equity in your home, you may not be able to claim the full amount as exempt. In this case, the bankruptcy court may require you to pay unsecured creditors, including the second mortgage holder, through your Chapter 13 repayment plan.
Cramdown vs. Lien Stripping
Cramdown and lien stripping are two different processes used in Chapter 13 bankruptcy. A cramdown allows you to reduce the principal balance of a secured debt to the fair market value of the collateral. While this can be applied to other secured debts like car loans, it generally does not apply to residential mortgages, including second mortgages.
In a Chapter 13 bankruptcy, you are required to propose a repayment plan to the court. This plan outlines how you will pay off your debts over a specified period, usually three to five years. If you have equity in your home, your repayment plan may need to include provisions for repaying the second mortgage to some extent.
Seek an Experienced Arizona Bankruptcy Lawyer
It’s essential to consult with a bankruptcy attorney in Arizona who can evaluate your specific situation, assess the state’s bankruptcy laws, and guide you through the process. Your attorney can help you understand your options, including the treatment of second mortgages in bankruptcy, based on your circumstances.
If you’re facing overwhelming debt that is impacting your personal, professional, or family life, it may be worthwhile to explore bankruptcy as a potential solution for debt relief. Our highly experienced Arizona bankruptcy law firm is here to assist you. At Chapter Bankruptcy Lawyers, we are dedicated to protecting your rights and leveraging our deep knowledge of bankruptcy law to your advantage.
We understand the challenges you’re facing, and our priority is to guide you toward a debt-free future. Whether you’re dealing with property concerns, wage garnishment, or burdensome credit card debt, our legal services begin with your initial step toward financial relief. Our committed bankruptcy team will stand by you at every stage of the process, offering expert advice and advocating for your best interests in discharging your debt.
Moreover, our Arizona-based bankruptcy law firm places a strong emphasis on clear communication with our clients and providing effective guidance throughout the bankruptcy process. We recognize that coping with financial stress and contemplating bankruptcy can be incredibly difficult. Whether you’re considering a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, rest assured that we are here to support you in achieving financial freedom, regardless of the reasons behind your decision to file for bankruptcy. Contact us today.