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The Truth about Bankruptcy and your Second Mortgage

mortgage calculations of the house

One of the most exciting areas of bankruptcy law is the ability to discharge or remove a second mortgage.  For years the ability to remove a second mortgage was largely irrelevant as property values rose year after year.  Now the power of the bankruptcy court has become one of the most powerful consumer protection laws on the books.  It is important for every home-owner to know his right to adjust his home mortgage through the bankruptcy law.

How can bankruptcy help discharge my debts?

Although this article refers to a lien on property as a "second mortgage" most types of liens including mortgages, home equity lines of credit, and other variations can be considered "second mortgages."

Bankruptcy law gives debtors great power over unsecured creditors.  For instance, in most cases all of the client's credit card debt will be discharged.  Other unsecured debts such as certain bank loans, personal loans, and payday advance loans can similarly be wiped away.

The great power of bankruptcy in the current housing meltdown is its power to treat a second mortgage as an unsecured debt when the first mortgage is under water.  That means that if your house is worth less than the amount owed on your first mortgage, you may be able to rid yourself of your second mortgage along with most of your other debts.  This is called a "lien strip" or a "mortgage strip"

What is required to get rid of my second mortgage?

In order to take advantage of a mortgage strip, a client must complete a Chapter 11 or Chapter 13 reorganization plan.  The plan requires monthly payments to the court to partially repay creditors for a period of 3-5 years.  In many cases the repayment to the court is lower than the the monthly second mortgage payment.  You will not have to pay your second mortgage while in bankruptcy, and of course you will continue to live in your house.

At the end of the 3 or 5 year plan, you can own your home subject only to the first mortgage and have no other debt to hold you back.

There is opportunity in the downturn.

 There is a bright spot in the housing crisis; those who bought homes at the peak can take advantage of the drop in property values too.  Come and speak with me about how you can own your home free of your second mortgage.

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