What Happens To My Second Mortgage In Bankruptcy?

To effectively answer this, you must first determine if there is any equity in the property for the second mortgage to attach to, which is very simple. If the value of the property is less than any liens against the property ahead of the second mortgage, almost always the first mortgage and often IRS tax liens placed against the property, then the second mortgage lien can be avoided (removed from the property) and the debt owed can be discharged as a general unsecured creditor. If, however, the value of the property is higher than the liens ahead of the second mortgage, then the lien will remain against the home and must be addressed differently.

In Chapter 7, if you cannot avoid the lien of the second mortgage or home equity loan, then it must be paid in accordance with the loan agreement. You must maintain monthly payments and catch up any past due payments. Chapter 7 will not trigger any additional rights for the second mortgage lender, so it is not like they would be able to foreclose more quickly than they otherwise would, but in the long run the loan will either have to be modified or brought current and paid.

In Chapter 13 you may have a few more options. First, some jurisdictions allow for a partial avoidance of liens. This means that when you do the equity calculation above, there is some equity in the home, but it is not as much as you owe on the second mortgage, then you can reduce the second mortgage to the amount of equity you have in the home. This is a partial lien avoidance. Not every jurisdiction allows this, having the rule that if there is any equity in the property then the lien cannot be avoided in any amount, and the full amount remains attached to the property. An experienced bankruptcy attorney in your jurisdiction will know how your courts address this.

If lien avoidance is not an option, then usually your Chapter 13 plan will have your ongoing monthly payment being made in accordance with the loan agreement, paid either by you directly or by the trustee through the plan payment. Any arrears on the loan will be included in the Chapter 13 plan and the trustee will pay them off over time. A loan modification can be sought to bring the loan current and restructure the payments while in Chapter 13. One consideration often available in Chapter 13 that is not available in Chapter 7 is the five-year rule. This basically says that if the second mortgage is scheduled to be paid off within five years of the date of the bankruptcy filing, then the loan can be modified in Chapter 13. In these circumstances, you may be able to reduce the amount paid back, lower the interest rate and eliminate the ongoing monthly payment, including whatever needs to be paid in the Chapter 13 plan payment.

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