Eliminating a Second Mortgage in Bankruptcy

In today's upside down real estate market, it is quite common for prospective debtors to seek bankruptcy help in an attempt to remove a second mortgage on their property. These mortgages were taken out of the equity when the home still had good value, but with the recession's plummeting home values now sit as fully unsecured liens.

A good portion of these prospective debtors are those who normally would qualify for a Chapter 7 bankrutpcy, i.e., their income is low enough to pass the means test requirements in order to file a Chapter 7. Their initial line of questioning is how to remove the second mortgage while filing Chapter 7. Unfortunately, the Supreme Court of the United States has held that eliminating second mortgages is not possible in Chapter 7. So what other options do these debtors have?

If the debtors are deadset on Chapter 7, they can either surrender their entire interest on the home or they must keep making payments on both mortgages. It is logical to assume in this case that because the second mortgage is underwater, the second is too. Thus, it may be in the debtor's best interest to surrender both and move in a different direction.

The other, perhaps better option, is to file a Chapter 13 and avoid the second mortgage. If the second mortgage is entirely underwater (meaning that the value of the home is less than the first mortgage alone), you can file an adversary proceeding within the Chapter 13 to eliminate the second mortgage. That second mortgage can still file a proof of claim and get paid as an unsecured creditor, but depending on the Chapter 13 plan filed with the court the result can have the debtors paying back as low as 10% on the second mortgage.

These are options that many prospective debtors don't know about. Consulting an experienced bankruptcy attorney can help discover options previously unknown and formulate the best plan for your financial future.