Second mortgages in Bankruptcy
Many people come to our office with the primary concern that they are having difficulties affording their home and that their lender will not work with them. Unfortunately, the Bankruptcy law as it exists today provided very little help in these situations. As a general rule, Bankruptcy, specifically chapter 13 in this article, only gives homeowners two options: walk away from their home or continue to pay their mortgage note each month plus an additional amount monthly to catch up any arrearages owed. The “Helping Families Save Their Homes Act of 2009” initially contained a provision that would have allowed Bankruptcy judges to modify mortgages in chapter 13, but the provision was so controversial that it was dropped from the final bill – that is a subject for another article however. The Bankruptcy law is not without recourse for homeowners however; in fact, the Bankruptcy law does allow us to help homeowners that have a second mortgage against their home. Under BAPCPA, the law in existence since 2005, a homeowner with a wholly-unsecured second (or third) mortgage may be able to “strip” the lien off their house in a chapter 13 Bankruptcy.
For example, if the fair market value of your home today is $150,000 and you owe $150,000 on your first mortgage, then the first mortgage is secured up to the full amount of the value of your home. The second mortgage then would have no remaining value in which to attach to your home. Using an adversary proceeding (a lawsuit within a Bankruptcy case), the homeowner could ask the judge to “strip off” the second lien from your home rendering it as just another unsecured debt (like a credit card) to be discharged in your Bankruptcy case.