Stripping Off Second Mortgages in Bankruptcy

The Minnesota Homeownership Center and the Housing Preservation Project have developed a new fact sheet that outlines the recent changes to Chapter 13 bankruptcy allowing 2nd mortgages to be stripped off if they are wholly underwater.


Prior to a ruling in "Fisette v. Keller" (actually court documents, here, if you're interested) this summer, limitations in the Bankruptcy Code prevented a mortgage on a principal residence from being modified in a Chapter 13 bankruptcy. Now, various courts have held that when the amount of the first mortgage is more than the value of the property, the second and third mortgages - and any other junior mortgages - are no longer secured and the limitation on modification no longer applies.  These underwater second and third mortgages can be treated as unsecured claims, similar to credit card debt, and stripped off (removed or cancelled) by a Chapter 13 plan.


The fact sheet defines when second mortgages may be "stripped off" - and when they can't.  


The Center is continually developing and updating our fact sheets around foreclosure prevention and homebuyer services.  Visit our website often for the most recent versions of these documents... they're free to download and distribute!