A lot of people turn up looking to get rid of their second mortgage through bankruptcy. This is done through what is termed a lien strip.

I know, it sounds dirty. Who came up with these terms of art anyway? Lien stripping. Discharge....

Anyway, the lien refers to your second or junior mortgage/equity line on your home. When you originally took out your second mortgage, the mortgagee or lender was protected by a security interest in your home. If you defaulted, they could pursue foreclosure to recapture your obligation. However, many homes are upside down these days. You need a self-contained-underwater breathing apparatus just to make it downstairs.

The current market value of the home may be less than just the balance on the first mortgage. If that is the case, then the second mortgage can be characterized as unsecured. In conjunction with a chapter 13 bankruptcy, you can do a so-called “motion to avoid the second mortgage,” also known as a lien strip. What that accomplishes is that the second mortgage gets turned into your everyday dischargeable unsecured debt in bankruptcy, just like credit card debt. Thus, upon completion of your chapter 13 bankruptcy, you cancel out the second mortgage, and often little or no payment would be made on it.

Long story short: not everyone can cancel out their second mortgage in bankruptcy. Your first mortgage must be greater than your home's value; and, you must successfully complete a chapter 13 payment plan. But for those that qualify and follow through, it's a great opportunity to use the faltering home values to your advantage.