The Law Offices of Eric Gravel specializes in Chapter 13 bankruptcies in the San Francisco and Oakland bankruptcy courts. We have helped thousands of clients keep their home, get rid of their Home Equity Lines of Credit and modify their mortgage loan to an affordable level.
Chapter 13 bankruptcy is a repayment plan of a portion of one's debt. There are 2 types of debt: secured and unsecured (there is a 3rd kind, the priority debt, which we discuss below). A secured debt is a debt secured by collateral. The best examples of secured debts are a mortgage (the collateral is the house) and car loans (the collateral is the car). Unsecured debt includes everything else: credit card debt, medical bills, tax debt (until a tax lien is filed), personal loans, student loans, etc. Chapter 13 bankruptcy deals with secured and unsecured debt.
The goal of a Chapter 13 plan, of course, is to repay as little of the unsecured debt as possible while managing the.secured debt. A great feature of Chapter 13 bankruptcy is the ability to treat some secured debt as wholly unsecured. The process is called "lien avoidance". It can apply to junior liens (such as home equity lines of credit - HELOC), tax liens or judgment liens.
A junior lien can be completely avoided if a home value has fallen below the balance on the main (first) loan. Let's take the example of a home that was purchased for $850,000 but is now valued at $650,000. The home purchaser put 20% down ($170,000) and after a few years still owes a little less than $680,000 on the first mortgage. The homeowner also took a Home Equity Line of Credit (the junior lien) of $50,000. Because the balance on the first loan ($680,000) is MORE than the value of the home ($650,000), the homeowner can file a motion to completely avoid the junior lien of $50,000 in a Chapter 13.