Can My Second Mortgage Be Discharged in Bankruptcy?
There are a lot of second mortgages on homes out there. In the 2008 mortgage boom era here in the Valley of the Sun, it was hard to find a home owner who had not tapped into their home's equity with a home equity line of credit. A lot of homes are also financed as 80%-20% first and second mortgage splits. When things went bad, a lot of those home owners turned to the bankruptcy code to get their houses in a more favorable equity position. Fortunately for home owners, second mortages can be discharged in a bankruptcy case.
Generally in order to have a second mortgage discaharged, the loan must be for a primary residence, and the loan must be completely unsecured. Also, probably the only chapter of bankruptcy that allows the second mortage discahrge is Chapter 13. Discahrge cannot apply to second loans in chapter 7 cases or investment properties.
How does this work? Assume for example that you are a home owner with a first and second mortgage. Assume you owe $300,000 for the fist mortage and $50,000 for the second mortage. Finally assume that the home has a fair market value of $250,000. In this event, the second loan is 100% unsecured because the value of the home is $250,000 leaving negative equity in the first loan of $50,000. In this event if the home owner files a chapter 13 case, put in their chapter 13 plan their intent to discharge or avoid the second lien, and successfully filed a properly noticed motion or adversary proceeding, the lien on the home would be stripped by order of the court, and their chapter 13 discharge would apply to the second mortgage.
If you have any questions about discharging a second mortgage in bankruptcy, please don't hesitate to call us. We have had many cases where we have successfully discharged 100% unsecured second mortgages. 480-355-1377.
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