Do you have a second mortgage?
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If you own a home, you have a mortgage, like most homeowners. Very few people own their homes outright. But some homeowners also have a second mortgage. A second mortgage is another loan that uses your home as collateral for the debt. If you’re struggling to deal with your debt, your mortgages may be at risk. Bankruptcy can affect your first and second mortgages. Here is what you need to know.
Why Take Out a Second Mortgage?
Some people take out a second mortgage to pay the cost of home renovations, repairs, addition, or other investment in the value of your home. In this case, it can make sense to tap the equity in your home since your home’s value should benefit from the proceeds of the second mortgage. But in other cases, a second mortgage was taken out for things that don’t improve the home equity.
Others take on a second mortgage or HELOC (home equity line of credit) to cover other expenses. Some tap home equity to help pay for their kid’s college. Still, others might take out a second mortgage to cover medical bills or other unexpected expenses. Some do it to pay off their credit cards in one lump sum to get out from under high-interest payments. In some cases, this is a bad idea.
What’s the Worst-Case Scenario with a Second Mortgage?
If you can afford your first and second mortgage payments, there’s no problem. But if you fall behind on your first mortgage or second, you can be at risk of foreclosure. Since both loans use the home as collateral, falling behind on one or either loan can spell big trouble. To make things worse, if you have an adjustable rate mortgage, your payments on these loans could easily escalate.
When the housing bubble burst, it proved disastrous for many homeowners because the equity that was securing their debt was gone. Plus, adjustable rate mortgages were more common during the big housing spike as were subprime loans so when the real estate market crashed, may homeowners struggled and couldn’t even refinance their loans because they had no equity.
How Bankruptcy Can Help with a Second Mortgage
With Chapter 13 bankruptcy, in some cases, a second mortgage can be “stripped off.” Stripping off means discharging. To do this, you have to have little or no equity to support the second mortgage. For instance, if you have a $150,000 mortgage and a $30,000 second mortgage, but your home’s value is only $145,000, you have negative equity. That means the second has no equity supporting it.
In this case, you should be able to strip off the second mortgage using Chapter 13 bankruptcy. Suppose your home was worth $160,000 under the same first and second mortgage loan conditions described above. That means there is enough equity for the first mortgage and another $10,000 of equity so support the second mortgage. In this case, you may be able to reduce the second mortgage to $10k.
How Bankruptcy Helps with a First Mortgage
Chapter 13 bankruptcy can also help if you’ve fallen behind on your first mortgage payments. Chapter 13 is a repayment plan, and it gives you from three to five years to catch up on past due balances while still making your current monthly mortgage payments. When you strip off all or part of your second mortgage, it is considered unsecured debt just like credit cards and medical bills.
With most Chapter 13 plans, bankruptcy filers pay little to nothing towards unsecured debt. Shaking this unsecured debt loose from your budget can make you better able to catch up on your first mortgage payments. Then, when your bankruptcy plan is complete, you should be back in good shape with your mortgage and with fewer debts than you had before Chapter 13.
To find out more about the benefits of Chapter 13 bankruptcy on a second mortgage, contact the Law Offices of John T. Orcutt today. Call +1-919-646-2654 now for a free bankruptcy consultation at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.