Using bankruptcy to get rid of a second mortgage

Since I recently took a look at the first opinion written by Melvin Hoffman, the new Massachusetts bankruptcy court judge, I thought it might be fair to even the score a bit and take a look at the last opinion issued by the judge Hoffman replaced, retiring Massachusetts bankruptcy judge Joel Rosenthal.

Turns out Judge Rosenthal’s last opinion (or at least the last one currently posted) is a good one for consumer debtors to know about — especially debtors who may have taken out home equity lines along the way.

Judge Rosenthal’s opinion in the Morales case is really just a short order allowing the Morales’, a married couple who filed a joint case, to get rid of (“strip away” in legalese) the second mortgage on their home.

And how might this be accomplished, you might ask? First, this type of relief is available to debtors who have filed a Chapter 13 bankruptcy case.

Next, the current value of the real estate must be low enough so that the second mortgage is completely unsecured. For instance, imagine a home purchased for $200,000, with a first mortgage that has a balance of $150,000. Later, the homeowners took out a $30,000 equity loan secured by the house.

Unfortunately, with the steep fall in Massachusetts housing prices, this home is now worth $130,000 in the market. This leaves the buyer’s first mortgage a little bit unsecured (to the tune of $20,000), but the second mortgage is entirely unsecured.

This is the situation that lets a homeowner strip away the second mortgage with a bankruptcy case. In the Morales case, Judge Rosenthal explains the mechanics of how it is done; first, the debtors must complete all their payments under their Chapter 13 plan, then they must receive the bankruptcy court’s discharge of their debts, and then they can request and receive a mortgage discharge on the second loan which can be recorded at the Registry of Deeds.

If you are in a similar situation, give me a call at (978) 975 – 2608 or send an email to info@douglasbeaton.com, and we can discuss if you are a good candidate for this sort of relief.

 

By Doug Beaton

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