Chapter 7 and Your 2nd Mortgage

Updated on June 13th, 2018.

Refinancing Your Second Mortgage

Yes, it may be an actual option. And as unlikely as it may seem or feel, if you have home equity now (at this writing in 2018) then a refinance may work but only if you have good enough credit. But how do you manage that after having filed a Chapter 7 Bankruptcy? Believe it or not, credit repair services use the same techniques outlined in the following Guide. The Attorney’s Guide to Credit Repair. It’s Fast, Easy and Guaranteed.

In fact many use the very same Guide. Follow this guide to repair your credit fast, including how to write letters to settle debts such as your 2nd Mortgage. Download it Now and Get Started Right Away with The Attorney’s Guide to Credit Repair. It’s Fast, Easy and Guaranteed.

Your 2nd Mortgage or Home Equity Line of Credit – Heloc

While it is true that you may be able to strip these off of your home in a Chapter 13, in a Chapter 7 you can’t, but, you may still be able to effectively ignore it (for a while) and keep your home.  However, the 2nd Mortgage or Heloc would still have a lien on the property.  You would then have to settle the lien or deal with it in some manner later on. Your 2nd or Heloc has two things over you

a) they have the promissory note that you signed promising to pay

b) they have a deed of trust or trust deed on the house which is a lien on the house also called a mortgage. 

If you have filed a Chapter 7 Bankruptcy, then the Chapter 7 discharges the Loan or Promissory Note, which means that the mortgage company or lending bank cannot collect money from you directly. They cannot sue you, garnish your wages, levy your bank account, or even ask you for money or anything like that.

If you still own the home, then you still have that 2nd Mortgage Lien called a Trust Deed or Mortgage on your property. Chapter 7 Bankruptcy does not remove that kind of lien from your house, not in the 9th Circuit Appeals Court’s jurisdiction. Therefore, if the value of the house is high enough, then your 2nd mortgage lender can foreclose that lien, but in order to do so, it must pay off the 1st mortgage and any unpaid property taxes first.

Some Things You Can Try Include, But Are Not Limited To: 

1.  Refinance Your Second Mortgage: Yes, it may be an actual option. But if you have bad credit, you will have to repair it first.

2.  If the Value of the house is higher than the balance on your 1st mortgage then you must deal with your 2nd mortgage now.  If it is lower than the balance on your first, then you don’t have to deal with them immediately, but you must deal with them eventually, because, remember, they have a lien on the house.

3.  If the value is relatively close to the balance on 1st mortgage then you will have to deal with the 2nd mortgage sooner rather than later because in not too much time, the value of the house will go up high enough for the 2nd mortgage company to be able to foreclose. If you cannot afford to settle it, you should consider trying a loan modification. 

4.  What most clients will do is make an offer to settle the 2nd mortgage lien in one payment, one time with no balance owing afterwards, and you must get that in writing from the bank before you mail your cashier’s check. You might have to take a massive 401k loan in order to be able to make such an offer, but if they take it, it would be worth it. 

5.  If you have previously filed a bankruptcy and then the 2nd mortgage lender cancels the debt and sends a 1099 for the “forgiven” balance next year, then you are able to deduct the amount because it was already previously “forgiven” or when you filed your chapter 7 bankruptcy and received your chapter 7 bankruptcy discharged. 

6.  Most clients will save as much as possible and then when they get a tax refund next year, they add that with the savings, and if possible, sell a car or some jewelry and then use that to make an offer to settle the lien. (Dear Reader, when I originally wrote this several years ago, most homes had much lower values and so it was so much easier to offer to settle such a second mortgage. However because home values have gone up considerably, it’s nearly impossible to do now.) 

7.  In any case, your Discharge Order from your Chapter 7 Bankruptcy prohibits  all kinds of collections.  Therefore, they cannot hound you, dunn you, or bother you, whether by phone, email or letters demanding payment of the loan or promissory note.  They have only one legal option, they can foreclose. It doesn’t mean that they won’t but knowing your rights, that they cannot, at least you can protect yourself.  REMEMBER however, that the 2nd Mortgage must pay off the 1st Mortgage in order to foreclose.

8.  If your home has significant value which it probably does, the loan modifications are an option to protect your home, and if necessary, selling your home as a method of preserving the home equity is also a great option. Not that those are the best options, but they are options. Additionally, Chapter 13 Bankruptcy may be a viable option as well.

THEREFORE, the probability of them foreclosing is lower and lower when the value of the house is lower than the balance on the 1st mortgage.  It’s simple math, they won’t pay off a $200K loan to get a $150K asset that they can then resell and only recoup $150K and they’d have to pay closing costs to sell it so they’d only net $120K. That would be a loss of $80K plus they would also lose all of the 2nd mortgage too which is probably another $50K or more on top of the $80K.

HOWEVER, when the 1st and 2nd are held by the same company and particularly if that company is a credit union, it may be possible that they’d foreclose anyway but if the payment on the 1st is getting paid, then it’s still not very likely.

Overall, when dealing with a 2nd mortgage, it’s risky, no matter what happens. A chapter 13 which would allow stripping off the 2nd mortgage, is risky too.  Even more so because your Chapter 13 Bankruptcy requires that you immediately go back to paying your regularly scheduled monthly mortgage payments on your 1st mortgage, and if the 1st was not yet modified on the date of filing the bankruptcy, then you’d be stuck with the unmodified mortgage payments. Also, most Chapter 13 Bankruptcies never get completed.  More than 70% don’t get a chapter 13 discharge because something happens that derails the payment plan such as a work stoppage or an illness, or even something unexpected such as a busted transmission. Stripping the 2nd mortgage off in a chapter 13 requires that you complete the three to five year payment plan, so it’s majorly risky because if you have a hypothetical plan payment of $350/mo and you pay it for 2 1/2 years and then if you cannot pay anymore and you don’t get your plan completed, guess what, you just tossed $350 x 30 months out the window.  That’s $10,500 that you’ll never get back, and that’s only if you get a payment that low to begin with.  Most are higher.

In Summary:

Offer to Settle Your 2nd Mortgage

So, in summary, making an offer to settle the balance on the 2nd after a Chapter 7 Bankruptcy, should aim to pay (I originally wrote 10% of the balance or less, but nowadays the percentage at this writing in 2018, must be much higher). However if the house is seriously upside down on the 1st mortgage already, you may be able to offer lower. But it does have to be paid in one payment once they accept and you must get them to accept it in advance in writing. You must not pay them unless you have it from them in writing that they will accept your settlement offer and that they will RELEASE the lien once they get the payment.

I’ll say it again just in case you didn’t hear me, they must agree to RELEASE the lien in writing once they get your payment. If they don’t agree to release the lien, don’t send the check.

Refinancing Your Second Mortgage

1.  Refinance Your Second Mortgage: Yes, it may be an actual option. And as unlikely as it may seem or feel, if you have home equity now (at this writing in 2018) then a refinance may work but only if you have good enough credit. But how do you manage that after having filed a Chapter 7 Bankruptcy? Believe it or not, credit repair services use the same techniques outlined in the following Guide. The Attorney’s Guide to Credit Repair. It’s Fast, Easy and Guaranteed.

In fact many use the very same Guide. Follow this guide to repair your credit fast, including how to write letters to settle debts such as your 2nd Mortgage. Download it Now and Get Started Right Away with The Attorney’s Guide to Credit Repair. It’s Fast, Easy and Guaranteed.

Why File Bankruptcy?

Ever considered it?

You may either make too much money or have too much equity in your assets, in which case, why bother?  You may have no job and nothing to take away from you, in which case, why not bother?

However, if you are like most families and people, you have an average income, average sized family and not enough income.  An average income would have been fine some years ago, but now, you’re making less and spending more, even if you have the same job.

As the price of gas, or milk, or health insurance, or baby-formula, or crunchy tacos goes up, while that might be good for the country if it forces us off of gas, milk, or crunchy tacos, it also means that your discretionary spending is shrinking faster than we can re-budget the little that’s left over.  

What are you going to do?

If you’re thinking that it’s immoral, stop it.  Two things, first look up the Jubile (Jubilee in Modern English) in your bible dictionary.  Second, think of the parable that ends with the statement that you cannot serve two masters, you cannot serve God and Mammon. You will want to Google the meaning of Mammon but it translates as ill-gotten gains, (some translations say filthy-lucre, and one just says wealth).  In other words, you cannot serve God and sin.  Kind of a no duh moment. 

But watch what the servant did. In that parable the servant was told by the Lord of the House that he was going to be fired because he hadn’t collected on the accounts.  As the accounts manager of the House, (think of House the way the English use it to mean business) he was a bad servant because he hadn’t collected.

So, upon learning that he was about to be fired, he settled many of the accounts.  Inquired of several of the Lord’s debtors, he would ask how much do you owe? Whatever answer he received, he would settle the account for less. Accounts of 100 measures of oil, or 50 bushels of wheat, or 100 buckets of barley, he settled for between 50% to 80% of the balance.

But what happened to him?  From the Lord who had threatened to fire him, and had called him a bad servant, that servant received a commendation. Think about that. Almost a promotion and he gets an Attaboy from his boss.  The business owner actually thanks him for getting .

Serving Mammon

Serving mammon is to try to get the last penny out of your debtors when in a tough economy no one can afford to pay. Wise action is when the accounts manager has enough sense to settle the accounts and at least get some money back into the business in order to continue operations. In doing so, he made his boss happy to get at least something instead of nothing which is what he was getting when the accounts manager was holding out for full price. In doing so, he also made friends outside the business just in case he did in fact get fired and had to leave.

What are your Creditors doing to you?  They’re trying to get the last penny out of you when in a tough economy no one can afford to pay. If they won’t be the wise servant and settle the accounts with you, then you be the wise servant and settle the accounts with them. If you can afford to pay a little, you do a chapter 13 and pay a payment plan. If you cannot afford to pay, then this is your JUBILEE year, and you do a chapter 7.

If you need help to settle your debts, your best bet for the best advice ever on how to do that is Right Here

If you decide you would like to file bankruptcy, Call 800-345-3292, 800 FILE AWAY 

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