Second Mortgage and Bankruptcy -Remove Your Second Mortgage

You may have taken out a second mortgage or an equity line of credit during the time when home prices where skyrocketing and it appeared that they would continue to climb. If you are stuck with a second mortgage, HELOC or junior lien that you cannot afford to pay, you should consider whether bankruptcy can help you get rid of your second mortgage. Section 506(a) of the bankruptcy code allows you to treat your second mortgage as unsecured debt in a Chapter 13 Bankruptcy.

In a Chapter 13 bankruptcy you can file a lien stripping motion that will treat your second mortgage or equity line of credit as unsecured debt. In order for the second mortgage to be treated as unsecured debt, the value of your home must be at or below the outstanding balance on your first mortgage. This means that your second mortgage or junior lien must be completely unsecured (there is no equity available in your home for it to attach to).

If your second mortgage qualifies to be stripped off your home, then your Chapter 13 plan can propose to treat your second mortgage as unsecured debt. During your Chapter 13 bankruptcy case you must file a motion or an adversary proceeding, for a determination from the court that the second mortgage or junior lien is wholly unsecured. Once the court signs an order finding that your second mortgage is completely unsecured then your Chapter 13 bankruptcy plan can treat the junior lien as unsecured debt.

What Does It Mean If Your Second Mortgage is Treated as Unsecured?

A Chapter 13 plan requires that you propose a 36 to 60 month payment plan to your creditors. The payment plan may propose to pay you unsecured creditors anywhere form 0% to 100% of the unsecured debt. If your second mortgage is treated as unsecured debt, then depending on your proposed Chapter 13 plan, you may be able to pay as little as 0% toward your second mortgage. After you have completed your Chapter 13 plan payments, then any outstanding unsecured debt that is dischargeable will be discharged as part of your bankruptcy. If your second mortgage was treated as unsecured then any amount that you did not pay back as part of your Chapter 13 plan will be discharged after you complete your Chapter 13 plan payments. If remaining balance on your second mortgage is discharged then you are no longer personally liable for repaying the debt back. Once you complete the Chapter 13 plan the second mortgage company must also release the lien that they hold against your home.

Please keep in mind that your Chapter 13 payment plan must be completed in order for the second mortgage or junior lien to released from your home. If you fail to complete the Chapter 13 plan then your second mortgage or junior lien will remain on the property.

Southern California Law Advocates: Long Beach Bankruptcy Lawyer