Both chapter 7 and chapter 13 bankruptcies in the Denver area deal the second mortgage differently. While chapter 13 may remove the lien only if your house value is upside down through lien stripping. There is no such tool available in chapter 7 as it only eliminates your personal liability to pay the debt. And the lender can still foreclose your property to recover his money. So exactly what does happen to a second mortgage in bankruptcy?
And the question whether you can keep your home depends on the type of bankruptcy you filed and your circumstances. But one thing for sure, second mortgages or home equity lines of credit (HELOCs) can make your bankruptcy a bit trickier.
In fact, due to the bursting of the US housing bubble in 2007 many of the homeowners now have multiple mortgages attached to their property. Colorado was hit hard by the housing bubble. Apparently these homeowners cannot remove a second mortgage lien in chapter 7, however, can keep their home using some legal strategies. On the other hand, chapter 13 allows them to remove this lien upon certain conditions.
Given is the complete detail of how each type of bankruptcy deals with a second or third mortgage. From this information, you can better decide which type of bankruptcy will be suitable for your needs.
Second Mortgage in Bankruptcy Chapter 13
Chapter 13 is just a repayment plan of your debts with some better terms. Your second mortgage will be considered as a secured debt if your home’s value is higher than the first mortgage. It will be a priority debt that you’ll be paying in a 3-5 years bankruptcy repayment plan.
Conversely, let’s consider that your home’s value is upside down. Which means its worth is less than the amount owed on the first mortgage. Now you are eligible to use a chapter 13 bankruptcy tool known as ‘lien stripping’ to remove second mortgage lien. Let’s find out how it works.
What is lien stripping and how it works
If your home is underwater when you file for chapter 13 bankruptcy, you can strip off second mortgage lien. But your property’s value should be lower than the amount of the first mortgage. Similarly, third or other junior liens can also be removed in the same way.
Another technicality here is that if the value of your house exceeds the first mortgage then you cannot strip the second lien. However, if the combined amount of first and second is greater than the house’s value. Then you can strip the third lien and so on.
Moreover, you should keep in mind that lien stripping is not an automatic process. And your Denver area bankruptcy lawyer has to file a motion arguing that your home’s value cannot secure a second mortgage. After that, the court converts the junior property lien into unsecured debt same like credit card debt. Which means the mortgage creditor can no longer have the right to foreclose. And you will be paying the debt amount as a non-priority debt in your chapter 13 repayment plan. Further, after the successful completion of bankruptcy, the remaining debt will be wiped off (discharged). Conversely, if you somehow fail to successfully complete the bankruptcy. The burden of lien and debt will be there same as before.
Second Mortgage in Bankruptcy Chapter 7
As discussed in the start, chapter 7 bankruptcy cannot strip off your second mortgage lien. And you can only ignore it for the time being. There is a common misconception that chapter 7 bankruptcy wipes off the second mortgage liens on the property after discharge. But this is, in fact, not true. When you file for chapter 7, your mortgage creditors can no longer ask you for debt payment. But your property still has a junior lien. And even after the successful discharge, it stays there as before. It’s only the elimination of your personal liability to pay the debt. And the lender can still foreclose to recover their money. But in order to so, they need to pay off the first mortgage and all the property taxes first.
Talk to A Denver Area Bankruptcy Attorney
The purpose of this article was to provide general information regarding the second mortgages and HELOCs in bankruptcy. But you should keep in mind that every case has its own technicalities. And only an experienced bankruptcy attorney can give the best legal advice that suits your needs. Barry Arrington has an impressive record of helping those who have fallen behind their debt payments. If you are also having some financial difficulties, schedule a free consultation with him. He will thoroughly analyze your case to tell the best available solution and let you know what your options are for your second mortgage in bankruptcy.