Can You Declare Bankruptcy on a Second Mortgage?

Most people only consider bankruptcy as a last resort when nothing else has helped them get out from under their debt. They may have gotten second jobs, sold extra items laying around the house, or taken out a second mortgage to consolidate debt and get a lower interest rate. But when all of those efforts fail and bankruptcy becomes inevitable, what happens to the second mortgage? Regardless of why you originally took out a second mortgage, your legal options at this point depend on which type of bankruptcy you are filing.

Bankruptcy could be your key to a fresh financial start. To get there, you’ll need to prove your need for bankruptcy in multiple ways, and we can help. Set up a consultation with Padgett & Robertson now by calling us at 251-342-0264.

Chapter 7 and Chapter 13 Bankruptcy

Before you get too far into this process, understand that a second mortgage is a secured debt. Unsecured debt, which includes credit cards and medical bills, isn’t backed by anything that lenders can take away if you stop paying. Secured debt is backed by an asset that the lender can seize if you do not make payments. Though it isn’t your primary mortgage, your second mortgage is secured by your home—if you stop payments on it, the bank can take your home.

This matters because it changes how the debt is handled during bankruptcy. In Chapter 7 bankruptcy, the debt itself can be discharged, but the lien cannot. While the bank cannot force you to make payments, they can then take ownership of the asset. Assuming you don’t want to lose your home, this is an issue.

In Chapter 13 bankruptcy, secured debts are given the highest priority in your repayment plan. The court will create a payment schedule that allows you to repay your secured debts over a period of three to five years, with some money going to your unsecured debts.

Lien Stripping in Chapter 13 Bankruptcy

Does this mean that your second mortgage will need to be paid in full as part of your Chapter 13 bankruptcy? Not necessarily. Lien stripping is an option that is only available for Chapter 13 filers, and it is only an option under specific circumstances.

You can only get your lien stripped if your home’s value is less than the value of your first mortgage. Imagine that you have a home worth $400,000. You have a first mortgage of $425,000 and a second mortgage of $60,000. The home’s value is less than your first mortgage, which means that you can have your second mortgage stripped.

If you go this route, the lien from the second mortgage is removed from your home and the second mortgage becomes unsecured debt. It is then considered equal to credit card debt, medical debt, and other types of unsecured debt. While you may pay some back as part of your repayment plan, it will likely be far less than what you owed.

Your Options in Chapter 7 Bankruptcy

Unfortunately, no such option exists for those filing Chapter 7 bankruptcy. While lien stripping used to be accessible to those in the Eleventh Circuit, that is no longer the case. No matter what, your second mortgage will be considered a secured debt in your Chapter 7 bankruptcy. You will either have to pay it off or risk losing your house.

Planning Your Next Steps

Lien stripping isn’t the only strategic tool available to those filing bankruptcy. However, without an attorney, it will be difficult to know how to make the most of this opportunity and give yourself the best chance at a new start. Whether you’re planning on Chapter 7 or Chapter 13 bankruptcy, talking to a local bankruptcy attorney is the best way to understand your options and plan for the future.

Find Out How Padgett & Robertson Can Help You

At Padgett & Robertson, we are committed to helping our clients get rid of uncontrollable debt through bankruptcy. We understand that life puts us in unpredictable situations, and sometimes you just need the chance to start again. To get started on your bankruptcy case or find out if it’s even an option for you, call us at 251-342-0264 or send us a message online.