Can my home mortgage be reduced with a Chapter 13 cramdown?

A Chapter 13 cramdown cannot be used for your residence, but you may have other options in Chapter 13 bankruptcy.

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Unfortunately, one of the limitations of the Chapter 13 cramdown is that it cannot be used on your primary residence. However, if you've got a mortgage that is upside-down, and you have more than one mortgage, you may be able to reduce your mortgage through a process called "lien-stripping".

Stripping "Junior" Liens in Chapter 13

Lien stripping allows homeowner to "strip off" second or third mortgages and home equity lines of credit (HELOCs) in certain circumstances. By getting rid of the lien, the debt becomes unsecured.

Example: Say you own a home worth $400,000 and have a primary mortgage of $450,000, and a second mortgage of $100,000. The second mortgage is junior to your primary mortgage. Because the equity in your home is not enough to cover the amount you owe on your first mortgage, the second mortgage is no longer secured by your property. In this situation, you can strip off the second mortgage lien. The $100,000 mortgage becomes part of your unsecured debt. 

What Happens to the Debt?

Most Chapter 13 filers repay only a portion of their unsecured debts through the Chapter 13 repayment plan. By stripping off the lien and making the debt unsecured, you may wind up repaying only a small portion.

To learn more about lien stripping and your other options for dealing with mortgage debt in Chapter 13, check out Nolo’s area on Your Home and Mortgage in Chapter 13 Bankruptcy.

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