Many homeowners have a second mortgage on their homes. It can be an effective tool for easing financial challenges, helping with renovations and other bigger expenses, or for creating a better arrangement when you first buy your home.
Like with any debt, there is a certain level of unpredictability as to how life challenges and financial challenges could affect a second mortgage and your ability to pay. Even if you were able to afford your first and second mortgages when you signed on, things happen, and you might find it a challenge to afford these things years later. The good news is you have options for dealing with mortgage debt, and bankruptcy might be one of the best options available.
How Bankruptcy Affects a Second Mortgage
Second mortgages are treated differently in bankruptcy than first mortgages. Unlike first mortgages, second mortgages, in certain circumstances, can be eliminated in bankruptcy using provisions of the bankruptcy code available in a chapter 13 bankruptcy filing. This method became popular during the housing crash for dealing with unforeseen financial circumstances and a rash of second mortgages, and helped many people filing for bankruptcy remain in their homes and eliminate the second mortgage.
A chapter 13 debtor can eliminate a second mortgage that is completely unsecured. So if a debtor has a first mortgage that is more than the value of their home, the second mortgage is considered completely ‘underwater’ or unsecured. In this circumstance, the second mortgage will be treated like an unsecured debt, such as a credit card. At the conclusion of the chapter 13, the obligation on any remaining balance on the second mortgage will be discharged and the lien completed eliminated from the home. That means if the homeowner decides to sell the home, this lien is no longer an encumbrance on the property.
Many homeowners who were underwater on their mortgages were able to use this tactic when the housing bubble burst. These people had multiple mortgages that were far greater than the actual value of their homes, and now that they have filed for Chapter 13, their second mortgage will be eliminated and they’ll be able to begin fresh with just a first mortgage payment more in line with their home’s value.
Dealing with a Second Mortgage in Bankruptcy Can Be Complicated
Obviously, determining the best way to handle a second mortgage and following through with a plan that favors the person filing for bankruptcy can be a complex process. In the past, people had enough equity in their home to cover their second mortgage, but in the last decade or so this is no longer the case. The ability to eliminate an underwater second mortgage in a chapter 13 is an incredibly useful tool that can restore financial stability to a homeowner’s life.
You can learn more about second mortgages in general from this article from thebalance.com.
How does all of this affect you if you are a homeowner with a second mortgage and financial challenges that have led you down the path toward bankruptcy? It’s possible you’ll be able to take advantage of this provision on second mortgages in a Chapter 13, but you’ll need the guidance of an experienced bankruptcy attorney.
For more information or to discuss the best way to deal with your home mortgages in bankruptcy, contact the law office of Frank J. LaPerch, PC at 845.942.5500.