Help for hurting homeowners

A rarely used bankruptcy court maneuver can help cash-strapped homeowners.

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More Oregonians are qualifying for a rarely used bankrupty court action that can cut down or even eliminate second-mortgage or home-equity debt.

Homeowners must owe more on their first mortgage than their house is worth in order to be eligible, a stipulation that applies to 20-25% of Americans.

The strategy works like this: Homeowners must first file Chapter 13 bankruptcy and file a motion asserting their home’s value has diminished to the point that it’s worth less than they owe on the first mortgage. If the motion prevails and the lender doesn’t challenge, the court will then cancel the lien the second-mortgage lender holds on the home. The lender’s secured debt is converted to unsecured debt, which most often is eliminated in full in the bankruptcy process.

It’s not a painless strategy. Filing bankruptcy will significantly damage a consumer’s credit.

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