A frequent issue that arises in bankruptcy is what to do about second (or third) mortgages in bankruptcy. Oftentimes the client can afford to pay his first mortgage, but it’s that pesky second mortgage that makes the house unaffordable. “If only I could get rid of that second mortgage.” Does bankruptcy provide any relief?
Once again, this is a situation where Chapter 13 might provide some relief that Chapter 7 does not. If you file Chapter 7, most courts will not allow you to get rid of (i.e. strip off) your second mortgage even if the property has no value in excess of the balance owed on the first mortgage. This means that in order to keep the house, you must reaffirm (agree to pay) both the first and second mortgages in full. On the other hand, if you file Chapter 13, you will be able to strip off the second mortgage if the balance owed on the first mortgage exceeds the value of the property.
For example, let’s say your house is worth 100,000 and you owes 105,000 on your first mortgage (not uncommon in today’s market). You also have a 30,000 second mortgage. If you file Chapter 13, you will be able to strip off the second mortgage. This means that the second mortgage will be treated as an unsecured debt and be paid whatever percentage your plan provides for payment of unsecured creditors. Therefore, if you complete the plan, you will come out of bankruptcy with only one mortgage on your house rather than two.