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| Second Mortgage or HELOC? |
As a bankruptcy attorney, one question I get a lot from clients is what happens to their second mortgage or home equity line of credit (HELOC) when they file for Chapter 7 personal bankruptcy? Bankruptcy law generally protects your home, car and certain other assets. But how does that affect a second mortgage? You can't fully discharge it in the bankruptcy if you are keeping your home. The good news is your personal liability on the second mortgage/HELOC is discharged in the bankruptcy. The lender cannot sue you or garnish your paycheck. The bad news is the lender still has a lien. This means they can foreclose on your house after the bankruptcy finishes and is discharged. However, don't panic yet. If there is no equity in your home, or the equity is less than the amount you owe on the first mortgage, foreclosing will not be a viable option for them. As long as your home does not increase a significant amount in value, you should be fine. Many homeowners will sell their homes before home values go back up in a few years. Read more about this in a
recent article on Fox News.
Bankruptcy is the last option for a person to get rid of his/her debts. If you have a second mortgage on your property, while you file bankruptcy, then you can get a discharge from it when you file Chapter 7. However, it has been found that most of the times, many bankruptcy attorneys suggest borrowers to file Chapter 13 after Chapter 7 and go for the option of lien stripping in order to strip off the second mortgage.
ReplyDeleteI usually recommend to people to save up and settle the 2nd mortgage. Usually with next years or the next tax refunds, and sell a car if you have to. Most of the time it will be easier and cheaper than the cost of a chapter 13 plus the 36 to 60 payments that must be made on the 13 as well. Also, you don't have to suffer through 3 to 5 years of a chapter 13. Nevertheless, sounds like it might be a great idea in some cases.
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