Since the housing crunch back in 2008, many Americans have found themselves underwater on their mortgages and even more people are buried under a second also. There is a way that allows the debtor to change a second trust deed from secured to unsecured debt and that is by filing a Chapter 13 bankruptcy. In the early 2000s as real estate prices continued to skyrocket, many individuals decided it was time to take out some of the equity in their home either by refinancing or taking out a second. Some, did this numerous times as interest rates continue to drop they would borrow more money using their home as collateral. When the real estate bubble burst, all these people quickly found out that they were upside down on their property. The people that were counting on being able to sell their home if they got in trouble, they found out quickly that selling was not an option and foreclosure might be in their future.
The economy followed in suit with the dropping the real estate market causing unemployment to increase and a drop in salaries. Most Americans found themselves owning a home that they owed way more than what the house would sell for. The lucky ones found out that if they could get rid of their second trust deed they might be able to make this work. That’s where the Chapter 13 bankruptcy came into the picture. A Chapter 13 bankruptcy allows an individual that has a steady income to repay part or all of their debt with a 3 to 5 year payment plan. Chapter 13, just like Chapter 7 bankruptcy shares the power of the automatic stay once the debtor files. Upon filing bankruptcy, the automatic stay is put in place, stopping all legal actions against the debtor including, harassing phone calls, foreclosure, lawsuits and wage garnishments. This gives the power back to the debtor. In a Chapter 13 bankruptcy, the debtor will have the option of keeping their home if they’re able to catch up on back payments and stay current with the first mortgage.
When filing for bankruptcy, debt is divided into secured and unsecured categories. Secured debt is where the creditor holds the property purchased as collateral. A good example of secured debt is a mortgage on a house. The creditor holds a lien on the property until it is completely paid off. In a Chapter 13 bankruptcy secured debts are paid first and unsecured are left to fight for the pennies that are left over. When a person owns a home that has a second mortgage that no longer is secured by the value of the property because it has dropped below the value of the first mortgage, the bankruptcy attorney will ask the court to strip the lien off second mortgage making it in an unsecured debt. Many times this will allow the debtor to be able to afford to keep their family home because they are no longer responsible to pay the second. When protecting family assets, filing for bankruptcy can take on a new complexity and should be done with the expertise of a bankruptcy attorney.