Second Mortgage & Bankruptcy

September 6, 2017

What Happens to My Second Mortgage If I File for Bankruptcy?

A second mortgage can be a huge burden to a homeowner. Second mortgages and home equity loans are usually sought to pay for unexpected bills that life may bring. What happens to a second mortgage when you file for bankruptcy? A second mortgage usually remains on your property unchanged. But, there are a few exceptions.

Second Mortgages Stay Attached to Your House After Bankruptcy

When you file for bankruptcy, the second mortgage remains attached to your house. This means that the second mortgage holder can still come after your house if you begin to default on payments. Therefore, in most situations, you will need to continue making payments on your second mortgage if you want to keep your house.

Chapter 7 Bankruptcy does, however, usually remove your personal liability for your second mortgage. If you do not sign a reaffirmation agreement during your bankruptcy case, you will no longer likely be personally liable for the repayment of the second mortgage. This means that your mortgage company can only come after your house through a foreclosure. They will not likely be able to come after you personally for collection.

Bankruptcy Can Sometimes Help You Reach a Settlement on Your Second Mortgage

This can sometimes give the bankruptcy filers an advantage in negotiating a settlement for the second mortgage. If your second mortgage is excessive and not secured by actual equity in the house, you may be able to settle for much less of the total amount. You may need to seek an additional attorney for this purpose. Such an endeavor would not be covered during a standard bankruptcy case.

Chapter 13 Can Sometimes Avoid a Second Mortgage Lien

In certain rare circumstances, a second or third mortgage can be avoided during a chapter 13 bankruptcy case. Any such mortgage would need to be not secured by actual equity. Essentially, the total value of your home would have to equal less than just your first mortgage. If your second mortgage is not secured by any actual equity in the house, you may be able to file a lien avoidance lawsuit during the chapter 13 case.
It is important to note that it is also required in most circumstances for the chapter 13 plan to be successfully completed. If you do not complete the chapter 13 plan, your second mortgage holder may challenge the validity of the avoidance order.

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