While in most cases filing for Chapter 7 bankruptcy will not impact your mortgage, Chapter 13 bankruptcy in another matter. When a debtor files for Chapter 13 bankruptcy and has a second mortgage he/she just may be able to win a bankruptcy discharge for the second mortgage on their home if it is considered unsecured debt.
When is a second mortgage considered unsecured debt?
If a bankruptcy debtor has a second or even a third mortgage on their home which is not secured by the value of the home, they may be able to discharge those secondary mortgages in Chapter 13 bankruptcy. This usually happens when a home is significantly underwater and is worth a lot less than the amount of money a homeowner owes on the mortgage(s).
Let’s imagine that a debtor in Chapter 13 bankruptcy has a home which is worth $150,000 and the first mortgage has a balance of $155,000. Let’s also imagine that the debtor in bankruptcy has a second mortgage with a balance of $60,000. Since the home is only worth $150,000, the second mortgage is not secured by the value of the home, making it an unsecured debt in the eyes of the bankruptcy court. Simply put, the mortgage of $60,000 may now be considered an unsecured debt by the bankruptcy court.
If you’re facing foreclosure on a home that has a second or third mortgage which is not covered by the value of the home, speak with your bankruptcy attorney about the possibility of discharging that secondary mortgage in Chapter 13 bankruptcy.