Getting Rid of Second Mortgages in Chapter 13 Bankruptcy (2024)

FAQs

Getting Rid of Second Mortgages in Chapter 13 Bankruptcy? ›

Through a lien strip, the bankruptcy court essentially takes your second mortgage (which is a secured debt where the lender can foreclose on your property if you miss your payments) and converts it to an unsecured debt (just like a credit card debt) by ordering the lender to remove its lien from the property.

Legally Remove a Second Mortgage

The secondary lien isconverted to an unsecured debt obligation through the process of “lien stripping”. You are simply required to make your best efforts to pay back the debt over a 36 – 60 month time period. Whatever is not paid will be legally eliminated through a court discharge.

You would have to get the lender to agree to let you pay a portion of the outstanding balance. The lender would then forgive the remaining balance. What Are the Tax Implications of Settling a Second Mortgage? If you settle the debt for less than you owe, you might face tax consequences.

In these situations, there will be no equity in the home to secure a second mortgage or other junior loans, and these loans may be reclassified as unsecured debts. This will allow these loans to be "stripped off," and they will be discharged once the bankruptcy process is complete.

Even if the second lender decides not to foreclose because they can't get anything out of the property, that doesn't mean they're going away. Eventually, once your home value increases or you pay down your primary mortgage enough to build equity in the property, they will be back—and they will foreclose.

The lien attached to the second mortgage or other junior secured debt is removed, which allows the debt to be reclassified as nonpriority unsecured debt, like medical and credit card debt. You pay your disposable income toward your unsecured debt through your Chapter 13 plan.

Second mortgage lenders are often willing to negotiate lump-sum payments of significantly less than the total amount due in order to avoid default and foreclosure. Depending on your circ*mstances, a mortgage settlement may be your best path forward.

Now, with our California Mortgage Relief Program, we are extending that relief to homeowners.” Through the mortgage relief program, past due housing payments will be covered in full – up to a maximum of $80,000 per household – with a direct payment to qualified homeowners' mortgage servicers.

If a home buyer secretly takes out a second loan from a different lender or a private investor to cover their down payment, it's considered a silent second mortgage. This is because the existence of this loan is being kept hidden from the first lender, which is illegal.

A forgivable loan is a "soft" second mortgage that is forgiven after the homeowner has met certain criteria laid out by the lender such as a period of time the borrower must remain in the home.

How do I know when my Chapter 13 is over? ›

You'll receive the final decree once the court is ready to close the case. In Chapter 13, you'll receive a debt discharge after completing your three- or five-year repayment plan. The court will close the case by mailing a "final decree" after the trustee submits a final payment distribution report.

If you still have a solid job or way to make money, but simply can't afford to fully pay what you owe, Chapter 13 is a good option to take. It lets you maintain more control over your finances and assets than you would with a Chapter 7 bankruptcy.

You can get at most two mortgages at the same time for your home in most cases. Depending on the lender you work with, the interest rates and requirements may vary. Also, instead of a second mortgage, you can go for a home refinancing to access more loans without taking on more mortgages on your property.

Taking out a second mortgage means you can access a large amount of cash using your home as collateral. These loans often come with low interest rates, plus a tax benefit. You can use a second mortgage to finance home improvements, pay for higher education costs, or consolidate debt.

Con: You're putting your home up as collateral

With a second mortgage, your home is your collateral. If you can't keep up with your mortgage payment, the bank could foreclose on your home.

Now you want to sell your house, but you're wondering if that's possible when you're carrying two home loans. The answer is yes, but think twice before you put up that "for sale" sign.

Many people choose to refinance a second mortgage to take advantage of interest rates that are lower than when they initially took out their second mortgage. Additionally, their financial situation may have improved, and they could qualify for lower interest rates that way.

It's also possible to refinance only your second mortgage. For instance, you might want to refinance a HELOC with an adjustable interest rate – one that changes over time – to a home equity loan with a fixed rate that remains the same, making it easier to budget for your monthly mortgage payment.

Refinancing a second mortgage can be worth doing in a few scenarios, such as when you can save money overall, reduce your monthly payment, or convert from a variable interest rate to a fixed one. It often works best if interest rates have substantially dropped since you took out the loan.