Homeowners who are behind on their payments and facing the threat of foreclosure need to take a hard look at all of their options. In the case of second mortgages, cashed-strapped homeowners who've seen the equity in their homes fall may want to consider seeking to discharge the second mortgage in bankruptcy.
At one time, it appeared that the federal loan modification program would be a viable option for many people. Known as HAMP, it was designed to keep people in their homes by working out a revised mortgage payment. Unfortunately, the program has not really delivered on its promise. Banks and their loan servicers have generally refused to lower the principal amounts owed on residential mortgages.
The federal government is working on revising the HAMP program to make it a more viable option for homeowners seeking mortgage modification. But homeowners must also consider other alternatives to pay down their debt and keep their homes, especially with the added burden of a second mortgage. For these homeowners, filing a Chapter 13 bankruptcy could be the answer.
Most homeowners do not know that a second mortgage can be discharged in a Chapter 13 bankruptcy. A second mortgage is considered unsecured credit if the home is worth less than the actual first mortgage. This is a little-known rule of federal bankruptcy law but one that can prove to be a lifeline for certain homeowners.
Filing for bankruptcy immediately stops any foreclosure proceeding, keeping the homeowner in the home while the bankruptcy court determines whether he or she has enough income to survive if unsecured debt is erased. One possibility is that the second mortgage can be discharged along with most credit card and other unsecured debt. Although taxes and student loans cannot be discharged, the home can often be saved.
Filing for bankruptcy shouldn't be considered lightly. But if the alternative is losing your home, talk to an experienced bankruptcy attorney.