Florida Homes are Underwater. Is Bankruptcy the Solution?

So many homes in Florida are now worth less than their mortgages.  Most folks that come to see me have a first and a second mortgage, or a mortgage and a Home Equity Line of Credit (HELOC) that together exceed the value of their home, preventing them from refinancing and choking their household budget.

What is a Lien Strip?

They want to keep their home, but cannot afford the status quo and come to ask about bankruptcy options. So what help is available?  Right now the only relief available is called a ‘Lien Strip’ of the second mortgage or HELOC in a Chapter 13 Bankruptcy. Lien strips are not as easy as they sound, though.

Requirements for Chapter 13 Mortgage Modification

A home owner must first have regular income that would support a Chapter 13 payment that includes the payment for the first mortgage, any other secured debt, attorney’s fees and administrative costs.  So, you need to be earning regular income. You must also be prepared to be in a financial purgatory for a period of time, usually three to five years (no credit cards, no debt, live on a budget, etc.).

An Appraisal Will Need to Show the Home is Underwater Based on the First Mortgage Balance

Finally, there has to be an appraisal done on the home prior to filing that shows the home is worth less than the principal balance of the primary mortgage.  If the appraisal shows the home is underwater based on the first mortgage, your bankruptcy attorney can file a lawsuit that will remove your second mortgage. You’ll then pay the second mortgage as an unsecured debt, sometimes at pennies on the dollar. The lien strip is temporary until completion of the full Chapter 13 Plan.  Upon discharge the strip then becomes permanent and should be recorded with the county court clerk’s office.    Even if this sounds appealing, there are many other variables to consider that should be thoroughly discussed with an experienced bankruptcy attorney.  Many give free initial consults.