The Tampa area was hit especially hard by the housing crisis. In early 2013, home prices are down by about 45 percent from their peak in 2006. Unfortunately, this means that many Tampa homeowners remain underwater on their mortgages, owing more than their home is currently worth.
Yet, there is a silver lining for underwater homeowners in the Chapter 13 bankruptcy process. When housing prices were high, many homeowners took out second mortgages or home equity lines of credit. Considering that housing prices have fallen so dramatically, many homeowners now qualify for a complete discharge of second mortgages and HELOCs in Chapter 13 bankruptcy proceedings.
Chapter 13 overview
Not all consumers are familiar with the nuances of a Chapter 13 bankruptcy. Unlike its cousin Chapter 7, Chapter 13 never involves liquidation of nonexempt assets. Instead, Chapter 13 filers establish a court-approved repayment plan to fully or partially repay creditors over a three to five year term.
Chapter 13 bankruptcy has many advantages. For instance, monthly payments on most types of debt are consolidated and often lowered; homeowners are given the chance to stop foreclosure in its tracks and catch up on delinquent mortgage payments; and, at the end of the three to five year repayment term, most types of remaining unsecured debt are completely wiped out.
How are second mortgages and home equity lines of credit discharged in Chapter 13?
For underwater homeowners, the elimination of second mortgages and HELOCs may be one of the most substantial values offered by a Chapter 13 bankruptcy. Under federal law, wholly unsecured mortgages can be removed in a Chapter 13 case. This means that if your home is worth less than you owe on your first mortgage, you can file a motion with the bankruptcy court asking for a discharge of your second mortgage upon the successful completion of your Chapter 13 bankruptcy. If the court agrees that your home is worth less than you owe on your primary mortgage, at the end of your Chapter 13 case, you will not be required to repay the second mortgage obligation – and, if you choose to sell your home in the future, the discharged second mortgage will in no way encumber the transaction.
The tricky part of securing the discharge of a second or third mortgage or a HELOC is often proving that the market value of your home is less than what you owe on your first mortgage. Evidence offered to the court that can fix the value of your home may include appraisals, affidavits and real estate tax statements.
Your bankruptcy attorney also may advise specifying the market value of your home as a provision in the Chapter 13 plan filed with the court. Such a provision should stipulate that the figure is binding on all creditors involved, and should then name the creditors, including the holder of your second mortgage. If the holder of your second mortgage fails to object to the number put forth in your Chapter 13 plan, they may not be able to later re-open the question of your home’s market value, potentially saving you time and money.
Ask a Tampa bankruptcy attorney if Chapter 13 is right for you
Many Tampa homeowners are struggling with home values that continue to lag. But, with a little help from a bankruptcy court, you could turn lemons into lemonade and eliminate second mortgages, HELOCs and many other types of debt. Contact a Tampa bankruptcy attorney to explore whether Chapter 13 bankruptcy is right for your individual circumstances.