With the rising number of foreclosures in the country, many of the struggling homeowners are opting to file bankruptcy as a means to get rid of their unmanageable debts. Queries related to bankruptcy are quite common in the forums these days. Here’s one such query on which the community had a discussion recently:
The poster wants to get rid of his debts including small business dues and credit card debts. He owns a property which has a first and a second mortgage. The value of the house is less than what is owed on the first and the second mortgage combined. He now plans to file Chapter 7 bankruptcy to get rid of his debts, while retaining the home. His queries are:
1.Can he list the second mortgage in bankruptcy to get it discharged, while keeping the first mortgage?
2.Will the second mortgage lender still be able to come after him?
Chapter 7 is an effective way to discharge debts
Bankruptcy Chapter 7 is one of the effective ways to eliminate debts which cannot be managed further. If the poster is really having difficulty in paying off the business debts and the high-interest credit card debts, he can file Chapter 7 and have them discharged through the bankruptcy. He wants to keep the property. He will have to list all his assets like his personal properties, real estate properties, etc. in bankruptcy. The court will then decide which of the assets will be sold to pay off the creditors.
Bankruptcy discharge and 2nd mortgage
Both the first and the second mortgages will be listed in bankruptcy. Since the property value is not enough to pay off the second mortgage even in part, it can get discharged through bankruptcy. This will release our poster from the personal liability towards the second mortgage. But it will not remove the lien from the property. The second lender will still have the right to foreclose on the property, until the junior lien is paid off in full. So, the second lender can still come after him even though the second loan has been discharged.
However, with the property being underwater, the second lender will hardly want to foreclose because there is a first mortgage on the property and that lien will have to be paid first when the house is sold.
Debt reaffirmation to keep the first mortgage
As far as the first mortgage is concerned, he will have to do a debt reaffirmation agreement with the first lender. Through the reaffirmation, he will enter into an agreement to continue making payments on time so the lender does not start foreclosure proceedings against the property after the bankruptcy discharge.
Chapter13 is a better option to strip off 2nd lien
In case the poster is really eager to have the second lien removed from the property, he can consider the option of filing bankruptcy Chapter 13. There is a concept called lien stripping, which can get the second lien stripped off from the property. Under Chapter 13 laws, if the property is underwater to such an extent that no portion of the second mortgage can be paid off by selling the property, the second lien can be removed. For instance, if the property is valued at $50,000 and there are a first mortgage of $ 60,000 and a second mortgage of $10,000 on it, the second mortgage cannot even be partially paid off. In this situation, the second lien can be stripped off the property.
Another reason why I think filing Chapter 13 will be a better option is that it will have a less negative impact on our poster’s credit than Chapter 7. He will be able to pay off his debts through repayment plan over a period of 3-5 years under the court’s supervision.
You can view the discussion on this topic at http://www.mortgagefit.com/bankruptcy/chapter7-secondloan.html