Chapter 13 helping Homeowners underwater to modify a home equity line

Today's Wallstreet Journal - When it's okay to walk away from your home.

Here is an interesting fact for homeowners who make too much money for Chapter 7:

Understand how a Chapter 13 might help you after all. Chapter 13 is "bankruptcy lite," for those whose income is too high to qualify for a Chapter 7. It involves a debt repayment plan (it's something like the Chapter 11 bankruptcy process used by corporations, though not as generous). In Chapter 13, the courts work out how much of your unsecured debts you can reasonably repay and set up a schedule to repay it.
Chapter 13 will not reduce the value of your primary mortgage. But make sure your counsel understands a little-known gap in the law that can help distressed homeowners who either have two mortgages, or one mortgage and a home equity line on top. If the property value has fallen so far that the primary mortgage is now under water, the courts can rule that the second mortgage is now an unsecured loan. And that, miraculously, means they can modify it. An example: You take out a $200,000 first mortgage and $50,000 second mortgage to buy a home for $250,000. The home then falls in value to $180,000. As that's not even enough to cover the first mortgage completely, the second mortgage now has no collateral against it at all. The court, in most jurisdictions, can now modify that second mortgage the way they could other unsecured debt, such as a credit card payment.That could include reducing it to zero.

Read the entire article:

http://online.wsj.com/article/SB10001424052748703795004575087843144657512.html