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How Bankruptcy Affects a Second Mortgage

How Bankruptcy Affects a Second Mortgage

There are many homeowners who have a second mortgage on their homes. In many of these cases, these mortgages were not taken because a person was facing financial challenges. For instance, some use a second mortgage to pay for home renovations. Second mortgages can be used to help someone through a difficult financial time, but they are also an investment tool that allows you to borrow against the equity in your home.

To read more about the pros and cons of having a second mortgage, check out this article from thebalance.com.</a>

Unfortunately, because financial struggles are hard to predict, there are those who bought a home they could afford, took out a second mortgage, and later found they were unable to afford their mortgage payments. In these cases, bankruptcy might be the best way to deal with foreclosure threats that include a second mortgage.

Eliminating Your Second Mortgage through Bankruptcy

Many bankruptcy attorneys have helped homeowners use a provision within bankruptcy laws to eliminate their second mortgage and stop foreclosure efforts on their home. Though there is limited data on how frequently this occurs, many familiar with the industry report there was an uptick shortly after the housing market crashed.

Depending on the type of bankruptcy you qualify for, some or all of your debts will be eliminated. For most homeowners, filing for Chapter 7 bankruptcy is not an option because they want to keep their homes. However, because second mortgages are handled differently than first mortgages, it might be possible to use bankruptcy to eliminate your second mortgage when you file for Chapter 13 bankruptcy. Second mortgages are considered unsecured debt when there is no equity to cover them, which is the case for millions of houses in the country today.

It can be an especially useful tool for homeowners who are underwater – meaning they owe tens of thousands (sometimes hundreds of thousands) of dollars more in mortgage loans than their home is now worth. Once their Chapter 13 payment plan is complete, their second mortgage is eliminated and they have the opportunity to make a fresh start in a home with a mortgage that is more in line with the home’s value.

Managing Unrealistic Mortgages after the Housing Bubble Burst

Mortgage lenders aren’t thrilled with this advantage, considering it can cost hundreds of thousands of dollars, but bankruptcy attorneys report the law has been like this for years. It was rarely used in the past because there was usually enough equity in the home to cover a second mortgage, but with the housing bubble this is no longer the case for many homeowners. And many people in the industry are reluctant to give mortgage lenders much sympathy for their losses because in many cases, they signed off on loans that should have never received approval.

So what should you do if you are facing foreclosure or considering bankruptcy and you have a second mortgage? You might have the opportunity to take advantage of the bankruptcy provision on second mortgages, but chances are it will be tough without the guidance of an experienced bankruptcy attorney.

If you have questions about second mortgages and how they are handled in bankruptcy, or questions about bankruptcy in general, we can help. Contact the Law Offices of Robert M. Geller at 813.254.5696 to schedule a consultation.

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At the Tampa Bay law firm, the Law Offices of Robert M. Geller, P.A., we help people with consumer bankruptcy matters in the Tampa Bay-St. Petersburg,  Florida communities such as Clearwater,     St. Petersburg, Tampa, Thonotosassa, Riverview, Lutz, Plant City, Brandon, Carrollwood, Wesley Chapel, St. Petersburg Beach, Lakeland, Mulberry, Dade City, Pinellas Park, Largo, Seminole, Odessa, Oldsmar and Lithia, and counties such as Hillsborough County, Pinellas County, Pasco County, Polk County and Manatee County.