Filing Chapter 13 bankruptcy with a second mortgage

Curiously, I received several calls this week inquiring whether filing a Chapter 13 bankruptcy would “automatically” eliminate a second mortgage. The simply answer is “maybe.”

If the amount of your first mortgage is greater than the current value of your home then the bankruptcy court has the ability of declaring any second mortgage or HELOC loans unsecured debt by virtue of the fact that the value of the home does not support the mortgages.

Declaring the second mortgage or HELOC as unsecured debt has the effect that now these mortgages are treated as any other unsecured debt (i.e. credit card) and the amount that the homeowner is required to payback is determined by their income.

As many homeowners took out Home Equity Lines of Credit (HELOC) prior to the mortgage meltdown, which was fueled by inflated appraisals and undemanding lending practices, they are now left with mortgages on their homes that exceed the current value of their real estate.

Furthermore, several personal finance advisers have been urging that obtaining credit after filing bankruptcy is not as difficult as we have been led to believe. Therefore, it seems that more and more people are at least contemplating the possibility of filing for Chapter 13 bankruptcy.

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