A Chapter 13 bankruptcy provides a homeowner various kinds of protection from their financial problems. By filing a Chapter 13 bankruptcy, you can stop creditor harassment, pay mortgage arrears over a 5-year period, and reduce or eliminate much of your unsecured credit card debt.
For homeowners with a second mortgage or home equity loan and an underwater first-mortgage, a Chapter 13 may permit the second mortgage to be “stripped.” This allows the loan to be treated as unsecured debt, like a credit card, because there is no longer any equity in the home to secure it.
Homeowner’s Association Foreclosure
When people fall behind paying their homeowners’ association dues, the arrears are collected in a lien, which financially behaves as a second mortgage.
With the recession and the collapse of the real estate market in Florida in recent years, many homeowners’ associations have become aggressive in foreclosing on properties when owners fail to pay association fees. Homeowner’s associations can use these liens and foreclose on amounts that are a fraction of the value of the unit.
When the value of the property declines below the first mortgage, making the mortgage underwater, a lien created by the association to collect back payments on association dues becomes a junior lien, unsecured and subject to modification by the bankruptcy code.
Depending on the terms of your association agreement, a Chapter 13 could allow a homeowner faced with a foreclosure to both stop the foreclosure and strip the lien at the same time. This would mean any arrears on the association dues could be treated in the Chapter 13 plan as unsecured debt.
In order to determine if this would work for you, you would need to speak with an experienced Florida bankruptcy attorney, as the variables are many, and each homeowner’s particular financial situation is unique. An attorney can work through the calculations and help you figure out if a Chapter 13 is the best solution to your financial problems.