As I wrote on our foreclosure defense blog, the foreclosure fraud settlement allows for principal reductions on loans held by the 5 major servicers. However, if you are planning on filing a Chapter 13 bankruptcy to strip the second mortgage on your underwater home, be careful about applying for one of the promised principal reductions. 

In most cases, any reduction in the principal balance of a loan is desirable. Your payment goes down, you approach having equity in your home, and life seems to be all sunshine and kittens. However, if you are planning on using a Chapter 13 bankruptcy to strip a wholly underwater second mortgage, beware. 

In a Chapter 13 bankruptcy, you can strip an unsecured second or third mortgage from your home and pay it back as if it was a credit card or other unsecured debt. However, if that second mortgage is secured by even $1 of the home's value, you cannot strip it in a Chapter 13. This means that if you obtained a principal reduction on your first mortgage, and it returned your home to even slightly positive equity, then you most likely cannot strip your second mortgage. 

Depending on your financial circumstances, it may be possible to strip a lien in a Chapter 13, then obtain a principal reduction on the primary mortgage later. As with any bankruptcy strategy, it is always wise to plan carefully and consult with an experience attorney.