You may be able to eliminate a second mortgage in a bankruptcy and that depends on whether you file a Chapter 7 or Chapter 13 bankruptcy. A second mortgage, which is also known as a home equity line of credit or HELOC is a loan that allows you to borrow money against your home’s value. Your property is essentially an asset, which acquires value over time.
A home equity line of credit works pretty much like a credit card, which means you borrow the money as and when you need it. It is different from a home equity loan, which is like a traditional loan where you get the funds up front that you pay back with fixed monthly payments.
How It Works in a Chapter 7
If you are filing a Chapter 7 bankruptcy, the trustee will liquidate unsecured assets to pay off creditors. But, in a Chapter 7 bankruptcy some types of property such as your home are exempt up to a certain value from liquidation. As a result, most individuals who file for Chapter 7 bankruptcy are able to retain their property. Once you have filed for Chapter 7, you may be able to get most of your debts discharged. So, essentially, your personal liability to pay back what you owed on your second mortgage is eliminated.
However, if you wish to continue owning your home, you will have to make payments on your second mortgage. This is because even though your personal liability is discharged after a Chapter 7, the bank has a lien against your home. So, the bank has a right to foreclose your home if you don’t make your monthly payments on your second mortgage or home equity line of credit. If you are running behind on your payments, filing for Chapter 7 might not help prevent foreclosure.
That said, the incentive for the HELOC lender to proceed with a foreclosure is not that high because the sale would be used to first pay off the first mortgage lender. The HELOC lender will only get what’s remaining from the foreclosure sale, which might not be much. So, the lender will be more inclined to help you refinance the mortgage rather than allow the home to be foreclosed.
Second Mortgages and Chapter 13
In a Chapter 13 bankruptcy, you can keep your home and pay back your debt in monthly installments over three or five years. You have a couple of options in dealing with your second mortgage under a Chapter 13 bankruptcy. You can “strip off” or remove the second mortgage if your home’s market value is less than the balance on your first mortgage. The second mortgage then becomes like credit card debt – an unsecured debt. In this manner, you might just being pennies on the dollar.
Chapter 13 also allows you to “cure” a second mortgage in your plan and prevent a foreclosure. For example, if you are $4,000 behind on your payments, you can pay off your debt by paying a fixed amount each month. If the court approves your plan, you don’t even need to get your bank’s approval for such a payment plan. Please remember that if you are opting for monthly payments to pay off your HELOC debt, you would still need to continue to make regular monthly payments on your second mortgage, in addition to what you are paying as part of the Chapter 13 plan.
If you would like to obtain more information about how to deal with your second mortgage in a bankruptcy, contact an experienced Arizona bankruptcy lawyer who can help guide you through the process.