How would you like to get rid of that pesky second mortgage (2nd Mortgage) on your house and still keep your house?
It’s quite possible, keep reading…
**** You could potentially, file Chapter 13 Bankruptcy to eliminate all your credit card debt, reduce your car payments, cure the arrears on the first mortgage, and now entirely remove your second mortgage! What’s more is that if the value in your home bounces back in several years, the increase in value is an increase in your equity.
If you are like many people in today’s economy, you have been faced with the situation where you have a home that is worth far less than what you paid for and you have two mortgages. Many times people like you were only able to purchase a home by putting twenty percent (20%) of the purchase price down as a down payment. Banks allowed purchasers to facilitate this by taking out one mortgage for eighty percent (80%) and a second mortgage for twenty percent (20%), or an 80-20, of the home’s value to use as a down payment.
In order to achieve your goal of “stripping off” a second mortgage, certain situations must be in place. First of all, you can’t achieve this by filing for Chapter 7 bankruptcy. The only real options in Ch. 7 bankruptcy are to
- (1) keep the home and pay the 2nd mortgage (or reaffirm the debt) or
- (2) to surrender the home and the mortgage as well as any deficiency that may occur.
Filing for Chapter 13 bankruptcy, on the other hand, may allow you to strip down your second mortgage if the right conditions are present. Your 2nd mortgage must be fully unsecured, as opposed to undersecured. An unsecured mortgage is one in which the value of the home is completely covered by the balance of your first mortgage. An undersecured 2nd mortgage is one in which only part of the mortgage is secured by the home because the first mortgage is in adequate as to cover the entire value of the home. Here’s an example of an 80-20 unsecured mortgage situation that is commonly seen:
- the purchase price of the home in 2003 was $365,000
- the home is now only valued at $250,000
- the first mortgage balance is $292,000
- the second mortgage is $73,000
However, here is an example of an undersecured 2nd mortgage:
- the purchase price of the home in 2003 was $365,000
- the home is now only valued at $250,000
- the first mortgage balance is $240,000
- the second mortgage is $150,000
In this case, the 2nd mortgage is undersecured because the second mortgage lender has a security interest of $10,000. Filing for Chapter 13 bankruptcy will not help in this situation as the 2nd loan is, although very little, partially secured.
There are always exceptions: the situation is likely that the 1st mortgage may fully cover the value of the home, but upon appraisal the home value comes in above the balance of the first mortgage, thus encumbering the second mortgage. In this situation, even where the 2nd mortgage is only secured by $1, a court may have to make the determination as to the valuation of the home. Also, you must fulfill the payments through the duration of your plan, which may be 5 years.
Further, even where the second mortgage is stripped off it may not completely vanish. The stripped off second mortgage will be treated similarly to all other unsecured debts in Chapter 13, meaning a portion will be paid back. The determination as to how much must be repaid will be derived from a calculation of the value of your unsecured debts compared to your disposable income.
