How New Jersey Homeowners Can “Cram-Down” or “Strip-Off” Second Mortgages in Chapter 13 Bankruptcy
New Jersey homeowners who file for chapter 13 bankruptcy protection may be able to cease paying their second mortgages if their homes are “underwater.”
When the amount that a homeowner owes on her mortgages is more than the home is worth it is considered “underwater.” Relief is available to New Jersey “underwater” homeowners through a Chapter 13 bankruptcy “cram-down” or “strip-off.” New Jersey homeowners can petition the United States Bankruptcy Court and request that their mortgages be cram-downed to the equity in the homes and the remainder of the loans stripped-off.
This means that homeowners who have multiple mortgages on their primary residence can take their mortgages and make them unsecured debt, thereby stripping-off all junior liens. This process applies to all subsequent mortgages as well. Therefore, second and third mortgages, and so on, would no longer operate as a lien on homes. Since it is then unsecured debt only a fraction will be repaid, and the remainder will be eliminated altogether.
For example, if a person owns a home that has a value of $400,000 and a first mortgage in the amount of $400,000 and a second mortgage in the amount of $50,000 and a third mortgage in the amount of $30,000, the second and third mortgage are “underwater” because there is no equity left in the home to secure them. Therefore, the New Jersey homeowner can take the second and third mortgage and strip-them, off thereby cramming-down the amount owed to the value of the home or $400,000. However, the first mortgage can never be crammed-down or stripped-off.
It is important to seek representation from an experienced New Jersey bankruptcy attorney because there are some catches. First, individuals would be required to file for chapter 13 bankruptcy protection and make reduced monthly payments through a chapter 13 plan for a period of three to five years before the mortgages are discharged.
Additionally, if even $1.00 of any subsequent mortgage is secured by the home, it cannot be crammed-down and stripped off. Therefore, if the home from the example above is valued at $400,001, then the second mortgage could not be stripped-off, but the third can be. The home valuation is thus a critical component of this process. It is therefore important to obtain a certified appraisal of the home before even considering filing for chapter 13 bankruptcy protection.
To avoid having their junior mortgages stripped-off, banks often obtain their own certified appraisals. Conflicting appraisals can result in extensive negotiations and an expensive legal battle. Having an experienced New Jersey bankruptcy attorney is therefore critical to ensure that your rights are adequately protected.
If your home is underwater or if you have questions regarding bankruptcy filings, our New Jersey bankruptcy attorneys can help. McLaughlin & Nardi’s New Jersey Chapter 13 attorneys regularly help represent New Jersey homeowners negotiate mortgage modifications and file for bankruptcy protection. Our attorneys have extensive experience representing debtors and creditors in various proceedings, including New Jersey bankruptcy. To learn more about what we can do to help, please contact our New Jersey bankruptcy lawyers by e-mail or at (973) 890-0004.