“IF I file for bankruptcy, what happens to the second or third mortgage on my home?” This is a common question asked by a lot of people. If you are filing bankruptcy to stop foreclosure and are already having difficulty paying your first mortgage as it is, getting rid of a second or third mortgage (especially when the monthly payments are high) can be the difference between being able to afford your home or not.
Without getting into the complexities of dischargeability under the different chapters of the bankruptcy code, I want to focus on the current practice of wiping out junior mortgages (often a second or maybe even a third mortgage) in Chapter 13 which has been made possible by the housing market crash. Due to the economic downturn and the drop in real estate values, many homeowners do not have any equity in their homes. Thus, in a lot of cases, these homeowners have second or third mortgages on their homes that are no longer secured by the home’s value. This second or third mortgage could be a purchase money loan (money that was used towards the purchase of the home) or maybe a home equity line of credit (HELOC) that was obtained after purchase. It doesn’t really matter. As long as you can prove that the current value of your home is equal to or doesn’t even exceed the amount of your first mortgage, a “lien strip” may be possible.
For example: Let’s say the current value of your home is only $350,000. You have a first mortgage for $400,000 and you have a second mortgage for $80,000. Under the law, a creditor’s claim on property is secured only to the extent of the value of the debtor’s property; otherwise, the claim is unsecured. In this example, the second mortgage is deemed “wholly unsecured” and thus can be “stripped off” and the $80,000 debt becomes unsecured for Chapter 13 purposes.
Now, keep in mind that just because the lien is “stripped off” doesn’t mean that it automatically goes away. It only means that the debt is now unsecured. Do you still need to repay a lien that has been “stripped”? Well, it depends. In most Chapter 13 cases, unsecured creditors get paid very little or nothing at all. Thus, doing a “lien strip” in a typical Chapter 13 case would have the end result of not having to pay back the second or third mortgage at all as long as you complete your Chapter 13 plan. Most Chapter 13 plans last anywhere from 3-5 years. While you are in Chapter 13, you no longer need to make your second or third mortgage payments.
If you file Chapter 7, on the other hand, the bankruptcy discharge will eliminate your personal liability on the second or third mortgage but it will not eliminate the lien. What this means is that if your property ends up in foreclosure, you can no longer be sued for the money owed. (A lot of people are unaware that they can still be sued by a second mortgage holder for the money owed even after they have lost their home in foreclosure. In California and other states, however, a second mortgage on your residence may not result in personal liability after foreclosure if the loan is a “purchase money loan”.) If you are unsure about whether or not you may be personally liable for a second or third mortgage after foreclosure, you should seek the advice of a competent bankruptcy attorney who can review your case and help you protect your legal rights.
For a free consultation, call my office at Toll-Free 1-866-477-7772 so we can carefully evaluate your case.
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None of the information herein is intended to give legal advice for any specific situation. Atty. Ray Bulaon has successfully helped over 4,000 clients in getting out of debt. For a free attorney evaluation of your situation, please call Ray Bulaon Law Offices at TOLL FREE 1-866-477-7772.
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