If you’re facing foreclosure and also have a second mortgage or HELOC, the pressure can feel overwhelming. It’s normal to start looking for ways to find help, and bankruptcy often comes up as an option to eliminate debt. However, whether bankruptcy can actually eliminate a second mortgage depends on the type of bankruptcy you file and how your loans are structured.
In this article, we’ll explain how Chapter 7 and Chapter 13 bankruptcy treat second mortgages and what happens when you file for bankruptcy, so you can understand whether bankruptcy is right for you.
While second mortgages can sometimes be discharged in bankruptcy, it’s not always the best option if you’re trying to stop foreclosure. Contact Denbeaux Law today for a free consultation to learn about the different options available to save your home from foreclosure.
What is a Second Mortgage?
A second mortgage is any loan you take out against the equity in your home, on top of your first mortgage. Common examples include traditional second mortgages and home equity lines of credit (HELOCs).
In foreclosure, the first mortgage has priority. That means the first lender gets paid first from the sale of the property. The second mortgage lender only gets what’s left, and if there isn’t enough equity, they may end up with nothing.
Secured vs. Unsecured Debt
To understand how bankruptcy treats a second mortgage, it helps to know the difference between secured and unsecured debt.
Unsecured debt, like credit cards or medical bills, isn’t tied to any property. If you don’t pay, the lender can’t take your assets from you without going to court. Unsecured debt can result in legal actions, such as wage garnishments, liens, or other enforcement measures, but they must be granted by a court first.
Secured debt, on the other hand, is backed by property. If you default, the lender has a legal claim, referred to as a “lien,” that allows them to foreclose on your home or repossess the asset used as collateral without court action, except in New Jersey, where the law requires judicial foreclosures.
Because a second mortgage in bankruptcy is tied to your home, it’s almost always classified as secured debt. That said, there are some exceptions for eliminating a second mortgage through bankruptcy.
How Bankruptcy Applies to Second Mortgages:
Whether bankruptcy can eliminate a second mortgage depends on the type of bankruptcy you file:
- Chapter 7 Bankruptcy and 2nd Mortgages: You cannot remove a second mortgage in Chapter 7 because it deals only with unsecured debts and does not let you restructure secured debts.
- Chapter 13 Bankruptcy and 2nd Mortgages: You may be able to remove a second mortgage in Chapter 13 because it allows for debt restructuring. If your home is worth less than what you owe on your first mortgage, the court can strip the lien and reclassify the second mortgage as unsecured debt.
While lien stripping is not available in Chapter 7, it may be possible in Chapter 13 if the right conditions are met. Even when lien stripping is an option, it comes with risks and challenges that homeowners should understand before filing for bankruptcy.
In other words, the only time you will be able to strip the lien is when the value of your home has dropped so much that your loan debt is more than the home is worth. In the current home market, that is unlikely.
Hiring an Attorney To Save Your Home From Foreclosure
Bankruptcy is rarely the best option for homeowners who want to eliminate a second mortgage and avoid foreclosure. The risks are high, and there’s no guarantee that lien stripping will even be approved.
The good news is, there are alternatives. Foreclosure defense, loan modification, forbearance, and other loss mitigation options can help prevent foreclosure without the long-term damage that comes with bankruptcy. At Denbeaux & Denbeaux, we focus on helping New Jersey homeowners find the right defense strategy to protect their homes. Contact us today for a free consultation to discuss your situation and explore your options.
