Underwater Second Mortgages, Third Mortgages or Equity Lines of Credit and Bankruptcy


Are you struggling with paying your first mortgage, second mortgage or even third mortgage each month? Is your house worth thousands less than what you owe? You are not alone. Millions of Americans have watched the value of their homes decrease month after month the last four or five years.

Many home buyers purchased their homes with an 80% first mortgage and 20% second mortgage. This allowed the homebuyer to avoid private mortgage insurance and put 20% down on the home. To make matters worse either one or both loans could have been interest only loans. Interest only loans allow the home buyer to only pay the interest for a period of time.

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So you have a home that is worth less than what you owe and you are only making the minimum interest only payment each month on the first and second mortgage. Any little financial problem will send you into a financial tailspin. The good news is that bankruptcy can help.

In Chapter 13 and Chapter 11 unsecured liens or loans can be stripped off the property in the plan of reorganization. How can you get rid of a mortgage in bankruptcy? Well, if the value of your house is less than what is owed on the first mortgage, then the second mortgage is completely unsecured or underwater. If the house was sold or foreclosed on the second mortgage company would get nothing, and that is how they are treated when reorganizing your debts in a Chapter 13 or Chapter 11 bankruptcy case.

The key is the value of the house. The first thing that needs to be completed is a valuation of the house by the bankruptcy court. A motion is filed with the bankruptcy court asking the bankruptcy court to value your home based upon comparable sales in your neighborhood. If the second mortgage company accepts the value you believe to be true there will be very little more to do. If the second mortgage company objects to the valuation an evidentiary hearing or mini-trial as to the value of the house will be scheduled. Of course the second mortgage company is trying to prove that your house is worth more than is owed on the first mortgage. If they are successful then the second mortgage is not completely underwater and not removable. If it is held that your house is in fact worth less than the first mortgage you will be able to strip off the underwater second mortgage or equity line of credit. You will only have to pay the first mortgage and the lien securing the second mortgage will be reconveyed once the Chapter 13 plan or reorganization is completed.


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