Relief for Underwater mortgage in Orlando? Only in Chapter 13

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Underwater mortgageAn underwater mortgage is a serious a problem for many Orlando homeowners. Earlier this summer, the Orlando Sentinel reported that Orlando was number 3 in the nation, and number 1 in Florida for the number of homes that an underwater mortgage – the  loan balance was more than the value of the house.  Many bankruptcy attorneys in Orlando have been trying to help their clients with an underwater mortgage with a procedure known as “lien stripping,” which is a form of legal surgery to remove a second mortgage lien from a homeowner’s property.  Bankruptcy attorneys have used the lien stripping procedure for their clients who chose a chapter 13 bankruptcy  to keep their homes with a three or five year payment plan.  What has been in dispute is whether lien stripping can be performed in a chapter 7  bankruptcy.

Unfortunately, for homeowners in Orlando, the answer is, for the time being, “NO.”  Last month, a bankruptcy judge here in Orlando ruled that second mortgage liens can not be stripped from homes, even when the balance of the first mortgage loan is less than the value of the house, leaving the holder of the second without any property value to secure the loan.

Many Orlando homeowners with an underwater mortgage are trapped in homes that they cannot sell because the property is worth less than the amount owed on first and, sometimes, second liens.  Lien stripping is still a useful tool in a chapter 13 proceeding to eliminate a second mortgage lien. Lien stripping can be done when the balance of the first mortgage exceeds the fair market value of the house.   By using this procedure, the mortgage debt is converted to unsecured debt, like a credit card debt, which can be paid in whole or part during a chapter 13 plan. However, to avoid foreclosure, the homeowner must continue to make payments on the first, and any arrears, during the life of the plan.

Other options for homeowners in Orlando with an underwater mortgage include short sale, foreclosure or waiting out the market. I advise those coming to me for help that bankruptcy solutions are designed to assist homeowners who are coping with financial distress.  There are no easy answers for this problem.

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