Secured vs. Unsecured Debt & Chapter 13 Lien Strips
For example, Allen owns a house with two mortgages in Lombard, Illinois. The house is worth $300,000, but his first and second mortgages total $450,000. The second mortgage is $125,000 and is completely unsecured by the property’s value. Allen can strip the second mortgage from his home and treat it as an unsecured debt, paying back a portion of the debt over the lifetime of his plan. As a result, Allen will have put himself in a position where he is only $25,000 underwater, as opposed to $150,000. During the course of his Chapter 13 plan, Allen will be paying down the balance on his first mortgage. Once he receives his discharge, his home may be approaching the break-even point on its equity.
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