Second mortgages and bankruptcy options
Filing for Chapter 7 bankruptcy means that you will be able, or will be forced, to surrender some of your possessions in lieu of paying off the loans. One of the questions that comes up often is how a 2nd mortgage bankruptcy works during Chapter 7 proceedings.
Will Chapter 7 wipe out my 2nd mortgage loan?
This question is one that people have frequently over the course of bankruptcy proceedings, and the short answer is that no, it will not. A second mortgage, also called a home equity loan, is a lien against your house. That means that your home is securing this loan, and if you plan to keep your home, then you cannot have the second mortgage loan discharged.
The exception is that if you are surrendering your home, then you may be able to get rid of your second mortgage. That’s because the property used to guarantee the loan is no longer yours. The complication here is that your home already has a loan against it. Your primary mortgage is simply a loan against your home, and that loan has “first right” over 2nd mortgages in bankruptcy proceedings. That means financial institution holding our primary mortgage will sell your house, and the proceeds go toward that loan.
The second mortgage can be paid only if the house fetches more than you owe on the primary mortgage, which is rare for a house surrendered in bankruptcy. In a Chapter 7 bankruptcy, that means you may have to roll the second mortgage into your reorganized debt repayment, depending on your income and other debts.
In some cases, you will be able to find a company to do refinance 2nd mortgage loans. In this case, you may be able to get your interest rate lowered or your term stretched to help you make the payments. Once a bankruptcy is complete, however, most people need to wait at least six months before they are able to get a refinancing loan completed.
The best way to find out how to handle a second mortgage during bankruptcy is to seek out someone who is adept at handling these proceedings and can advise you on your debt consolidation options. There may be choices other than continuing to pay at the current rate or losing your home, and someone with a specialization in debt consolidation plans can help you wade through the choices to determine what’s best for you.