Second Mortgages & Bankruptcy
- The value of your property is used as collateral when borrowing on a second mortgage loan. For example, the assessed value of the home is worth $200,000. There is a first mortgage, with a balance of $125,000 left to pay. Therefore, there is $75,000 worth of equity in the home. If you were to take a second mortgage loan for $50,000, there would still be $25,000 left in equity of the home. The second mortgage is treated much like the first mortgage--payments are due monthly for a certain amount of years.
- Using the example above, if, for instance, the value of the home were to drop from $200,000 to $125,000, not only would there be no equity in the home, but the second mortgage would also become "unsecured." Unsecured debt cannot be backed by a home or property as collateral. Credit card debt is also considered unsecured. The first mortgage, however, would still be secured debt because the value of the home is equal to the balance.
- Debt can become overwhelming for many reasons. In the event of missed mortgage payments, the mortgage company can begin foreclosure proceedings. Before the foreclosure is filed, you have the ability to file for bankruptcy. Typically, a lender will not begin foreclosure proceedings unless payments have been missed for two to four months.
- Individuals usually file for either Chapter 13 or Chapter 7 bankruptcy. Each type offers different options to eliminate or reduce debt. With Chapter 13 bankruptcy, you must create a repayment plan with your lenders. A bankruptcy judge will approve your motion, assuming you earn enough income to afford the repayment program. Most people are eligible for Chapter 13 bankruptcy; however, not everyone is eligible for Chapter 7.
- Chapter 13 bankruptcy focuses on settling a repayment program that is affordable for your financial situation. Typically, the program lasts three to five years. Once the program is complete, any unsecured debt, such as a second mortgage and credit cards, will be eliminated. Chapter 7 bankruptcy can only cancel secured debt. In the case of a second mortgage, Chapter 7 can only eliminate the debt if the equity left in the home is equal to or greater than the second mortgage balance. Chapter 7 bankruptcy can also cancel tax liability if your property loan suffers a loss.
- A bankruptcy lawyer should be consulted before deciding which program is best for you. When meeting your lawyer, you should bring current pay stubs, bills, past-due notices, and the most recent copy of your income taxes. This information will help your lawyer aid your final decision.