Lien Stripping In Ch. 13 Bankruptcy A Neat Way For Qualified Underwater Homeowners To Stiff 2nd Mtg Holders w/out Risk Of Future Collection Attempts

In New York City, the New York Post reports:

• Underwater homeowners are jumping onto an unexpected financial life raft that lets them escape crippling second mortgage debts and keep their homes -- Chapter 13 bankruptcy. It's an unprecedented byproduct of the housing price collapse, says New York City bankruptcy attorney David Shaev of Shaev & Fleischman.

• How it works is this: If the home is appraised at less than the value of the first mortgage, the owner can apply for permission in bankruptcy court to reclassify the second mortgage debt. That changes it from a secured debt, which must be repaid, into an unsecured debt, which does not have to be paid in full. The homeowner can then focus on paying off the first mortgage.

• "This is the only time where you see such a huge percentage of houses worth less than the first loan, allowing us to basically get rid of the second loan," says Shaev, who estimates that 20 percent of his Chapter 13 clients who own homes qualify for this type of workout. "We're at a unique place in history."

For more, see Liening on banks (Second mortgages are next housing crisis).

For an earlier "lien stripping" related post, see Lien Stripping Bankruptcy Court Trial Between Homeowner & 2nd Mortgage Lienholder A Battle Of "Dueling Appraisers".