Second mortgage foreclosure occurs when a lien holder on a piece of real estate files for foreclosure usually because the property owner has failed to stay current on the loan. The foreclosure process begins when a mortgage lender, which may have a first or second mortgage on the property, files a lawsuit with the court stating the property owner failed to make payments according to the original terms of the contract of sale. When this occurs, the courts take over the process.
How Lien Stripping Occurs
During the foreclosure process, the property owner may elect to file bankruptcy, which will put an immediate halt on the foreclosure proceedings. By taking this action, the property owner has more time to work towards a solution to settle the debt. This does not stop the foreclosure process altogether, but freezes it.
The bankruptcy court will then examine the case. In most second mortgage arrangements, the first loan on the property is the primary secured loan. The secondary loans are only secured after the primary loan is secured. When a lender brings on the foreclosure process, the lender wants the court to determine if a sale of the home is necessary to repay the debt. However, in some cases, the court may rule the secondary mortgages are not secured property. This is called lien stripping.
This is what may occur:
- The property owner purchases a home using a mortgage.
- At some time in the future, the property owner takes out a secondary loan on the home with available equity. Equity is the value of the property without a mortgage owed on it. Both the first and second mortgages are secured because the value of the property is high enough to cover both loans if sold.
- The property value falls for some reason.
- The bankruptcy court or other court reaffirms the first mortgage, assuming the property owner has maintained the loan and the loan is in good standing.
- If there is insufficient equity funds left in the property value to cover the second mortgage, the court may strip the property of the lien, meaning the debt becomes an unsecured debt, no longer tied to the value of the home.
- This may stop the foreclosure of the home by the second mortgage lender.
The process of lien stripping may occur during the bankruptcy process. It can help the homeowner to keep his or her home after the bankruptcy case.
Hiring An Attorney
In these complex situations of second mortgage foreclosure, an attorney is often beneficial. Work with an attorney to ensure the process moves forward the best way possible.
