When the debtor declares bankruptcy, it is usually assumed that the first mortgages will be confirmed and repaid or the house will be returned to the bank for sale. Can a second mortgage be discharged in Chapter 7?
If you are still the homeowner, you still have a second mortgage called a trust deed or mortgage on your property. Chapter 7 Bankruptcy does not remove this type of lien from your home, which is not under the jurisdiction of the 9th Regional Court of Appeal. Therefore, if the value of your home is high enough, then your second mortgage lender can close the lien, but to do so, you must first pay off your first mortgage and any unpaid property taxes.
Some things you can try include:
- Refinance your second mortgage: Yes, it can be a real option. But if you have bad credit, you need to fix it first.
- If the value of your home is higher than the balance of your first mortgage, you must now take care of your second mortgage. If it is lower than the balance on the first, you do not have to face them immediately, but eventually you have to deal with them, because remember that they have a pledge at home.
- If the value is relatively close to the balance of the first mortgage, you will have to deal with the second mortgage sooner rather than later, because soon the value of the house will rise high enough for the second mortgage company to be able to exclude. If you can’t afford to settle it, you should consider modifying the loan.
A common misunderstanding is that mortgages cannot be removed through bankruptcy. In fact, 2nd mortgage (and HELOC) CAN be removed and / or released by bankruptcy.
Here’s how they are treated by the bankruptcy court
HELOC in Chapter 13 on Bankruptcy: In Chapter 13, paying entities are required to make payments to the main mortgage lender and trustee of bankruptcy. The trustee distributes these payments to priority debtors. After the HELOC case is over, you can eliminate (release). The lender will receive a percentage of the trustee’s payments during the case.
HELOC in bankruptcy in chapter 7: in chapter 7 you can cancel a debt under a share credit line, but you cannot cancel a pledge on your home. In fact, the HELOC lender may still be able to close access to the archiving entity’s home after bankruptcy (although if there is no equity in the home, this would be unlikely). One way to avoid exclusion after the end of Chapter 7 is to confirm the payment to the HELOC lender during bankruptcy.
Second Mortgages in Chapter 13: Second mortgages that are no longer secured by the value of the house may be written off in Chapter 13 bankruptcy. Underwater houses may have a second or third mortgage that is no longer secured by the value of the house (i.e., the sum of the loans is more than is currently worth it.) However, repayment of the second mortgage will not affect what the debt collector owes for the first mortgage.