A 2nd mortgage or home equity line of credit (HELOC) can be a very tricky situation when it comes time to file bankruptcy. Unfortunately, due to the housing collapse and the Great Recession of 2007, many people in this country have multiple mortgages or other types of loans attached to their homes, often a high rates of interest. Despite what people may think, 2nd mortgages and HELOCs CAN be stripped and removed through the 2nd Mortgage Lien Stripping process in a bankruptcy if you have the right circumstances.
Here’s how they’re treated by the bankruptcy court
A HELOC in Chapter 13 bankruptcy:
Chapter 13 bankruptcies require debtors to make payments to the holder of their primary mortgage holder as well as a Chapter 13 Trustee. The Trustee’s job is to distribute these payments among the creditors who hold priority status. In a Chapter 13, your HELOC debt may ultimately be discharged as the lender will have likely gotten a percentage of the payments you made into your case through the trustee’s office.
A HELOC in Chapter 7 bankruptcy:
In a Chapter 7 Bankruptcy, you can cancel the debt on your home equity line of credit. The only problem with this is the fact that you can’t cancel the lien that the creditor has on the house. As a matter of fact, the HELOC lender could possibly still foreclose on your house after the bankruptcy has concluded. While it would only benefit them if there was equity in the house, there’s still technically no way to stop them from doing this. The best way to avoid a foreclosure after a Chapter 7 has concluded is to sign a reaffirmation agreement with your HELOC lender during the bankruptcy.
Second mortgages in Chapter 13:
2nd Mortgage Lien Stripping is possible when a second mortgage isn’t secured by a home’s value and can potentially be eliminated in a Chapter 13. Homes that are underwater may have second and third mortgages that aren’t secured by the value of the property anymore due to the fact that the amount of the loans total more than the current value of the property. One thing to remember though is that discharging a second or third mortgage will have no effect on what you owe on your first mortgage and you will still have to pay that mortgage in full.
If you find yourself facing the reality of foreclosure due to a second or third mortgage on your home and you think that 2nd mortgage lien stripping may be right for you, come see one of our experienced attorneys at Harmon and Gorove today. Our attorneys have decades of experience handling cases like this and they can advise you if you will benefit from this valuable tool under the bankruptcy code.