- Unsecured debts, or ones without collateral attached, will be discharged in a Chapter 7 bankruptcy following a liquidation of your non-exempt assets. In a Chapter 13 bankruptcy, these will become part of a three to five year payment plan paid for with your disposable income and will be discharged once the plan concludes. On the other hand, secured debt — such as a mortgage lien — is not usually discharged. Secured lenders may collect on your debt via foreclosure proceedings or repossession, or you may reaffirm the debt in order to keep possession of the collateral. That said, there is one exception to this rule in which certain mortgage liens may be discharged if specific conditions are met.
- Typically, your home is attached to a second mortgage or equity line of credit as collateral. What this means is that if you default on such a loan, the lender may attempt to collect on the debt via foreclosure proceedings. However, if the value of your home is worth less than your first mortgage, and if you file a Chapter 13 bankruptcy, you may be able to have a second mortgage lien stripped. In other words, the debt still exists, but it is no longer secured by your home, which means the lender can't go after your home if you default. Since it becomes an unsecured debt, you will pay off as much of it as you can via a three to five year payment plan. The length and amount of debt you pay off will depend on your disposable income. Then, once your payment plan concludes, the remainder will be discharged.
- In most cases, lien stripping is not allowed in a Chapter 7 bankruptcy. However, if you’ve already filed Chapter 7, you may be able to file a subsequent Chapter 13 bankruptcy and have a second mortgage lien stripped. The court is more likely to approve this if real estate values have declined since you filed for Chapter 7. Once the trustee "strips" your lien, you will be required to pay off the debt via a three to five year payment plan, after which, the remainder of your debt will be discharged.
- If you have a mortgage lien that can’t be stripped and you are facing foreclosure, you still have options. For example, you can reaffirm the debt with the trustee’s and lender’s permission, make up missed payments, and continue to make current payments in order to keep your home. Additionally, most states have a homestead exemption that protects a portion of your home’s equity from your creditors. In a Chapter 7 bankruptcy, the trustee may still force the sale of your home, but you will be entitled to receive your state’s homestead exemption amount. However, when the home’s value is less than your mortgage, both your lender and the trustee will typically prefer that you reaffirm the loan and keep your home.
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