Second Mortgages and Bankruptcy

With the real estate market decline in recent years and resulting depreciation in home values, many people have been inquiring about what happens to a second mortgage on your home if you file for Chapter 7 or Chapter 13 bankruptcy.  Many people now have second mortgages that are no longer secured by their home's value.  For instance, if your home is now worth $300,000 and you owe $300,000 on a first mortgage and $50,000 on a second mortgage, the value of your home will secure your first mortgage but there is not enough equity in your home to secure any of the amount owed on the second mortgage.

If you file for Chapter 7 bankruptcy in Kansas City, the bankruptcy discharge will eliminate your personal liability and any lien on the first mortgage if you are surrenduring your home.  However, on the second mortgage the bankrupty discharge will only eliminate your personal liability, and not the lien.

If you file for Chapter 13 bankruptcy in Kansas City you can eliminate your personal liability and the lien on a second mortgage under a procedure called "lien stripping".  "Lien stripping" allows you to eliminate a lien that has no security in the home.  However, the lien cannot be eliminated if it is at least partially secured by a portion of your home's current value.  So, if your home is worth $300,000 and you owe $275,000 on a first mortgage and $50,000 on a second mortgage you cannot "strip" the second lien because it is secured in part by a portion of your home's value.

Even if you cannot "strip" a lien, it will still likely have very little effect on your financial future.  Due to the Chapter 7 discharge of your personal liability for the second mortgage you cannot be sued for any money owed on it.  Additionally, without value in the home securing the second mortgage, the second mortgage holder would not benefit from a foreclosure since all of the value of the home would go to the first mortgage holder in a foreclosure sale.  Therefore, it is unlikely there will be any negative consequences from the second mortgage lien remaining on your home after bankruptcy unless the home's value rises enought to allow you to sell the home or to support foreclosure by the second mortgage holder.

In summary, a Chapter 13 bankruptcy will allow you to "lien strip" but Chapter 7 may suit the debtor just as well if they are severly underwater in the second mortgage (meaning they owe more on the first mortgage than the home is worth).  For more information please see the attached article on bankrate.com  http://www.bankrate.com/finance/mortgages/bankruptcy-may-end-second-mortgage-woes.aspx.  As always, also please feel free to check out my website for additional bankruptcy information  http://www.thesmalleylawfirm.com