Bankruptcy and second Mortgages
If you have purchased a home and have a primary and secondary loan or you have obtained a home equity loan in addition to your primary loan you may be wondering how bankruptcy will affect your second mortgage. A second mortgage on your primary residence will complicate the bankruptcy process and you should contact a bankruptcy lawyer for more information, but generally, the most important factor is the value of the property at the time you declare bankruptcy.
When is my second mortgage a secured loan?
To explain when you may dump or strip your second mortgage or get rid of a second mortgage through bankruptcy it is best to give some examples:
Property worth $300,000
If you purchased a home for $300,000 with a primary loan of $250,000 and a secondary loan of $50,000 and the value of your home at the time you file for bankruptcy protection remains $300,000 than the court assumes that both lenders hold secured notes. This means that your home could be foreclosed and sold for the full value of both secured loans. If you choose to file bankruptcy because the second loan is backed by the equity of the home it cannot be stripped but must be paid through the Chapter 13 Bankruptcy plan.
Property worth $250,000 or less
If you purchased a home for $300,000 but the home is now worth less than the primary loan than the secondary loan becomes unsecured because the secondary loan is no longer backed by the equity of the house and may be “dumped” or “stripped” if you file Chapter 13 Bankruptcy.
How do I get rid of my secondary loan through bankruptcy?
Lien stripping or dumping a second mortgage allows you to classify your secondary loan as unsecured debt rather than secured debt within your Chapter 13 Bankruptcy plan. Unsecured debt is restructured and paid over 3 or 5 years, and at the end of your bankruptcy plan, assuming you have made your payments, the unsecured debt is discharged (including the secondary loan). What happens to your primary loan? The primary loans remain unless it was paid in full during the plan period. If not, you now have only one mortgage (the primary loan) which you must continue to pay until you have paid the entire primary loan amount.