Seymour's Blog

"How to Wipe Out a Second Mortgage on Your Home"

Chapter 13 has many benefits for homeowners. If you are behind on your mortgage payments, you can get five years to pay back your mortgage arrears. That is one of the most well known benefits of a Chapter 13.

A much lesser known benefit, but one of very great value, is the fact that you can actually wipe out your obligation to pay a second mortgage on your home.

This benefit comes into play when your home is “under water”, which is a term commonly used to indicate that you owe more money on your mortgages than your home is worth.

Unfortunately, this is becoming a more and more frequent occurrence in today’s economy.

The easiest way to illustrate this benefit is by way of an example. Let’s assume that you bought your home for $250,000 in 2006, pretty much at the height of the real estate boom. Let’s further assume that you owe a balance of $210,000 on a first mortgage and a balance of $35,000 on a second mortgage. 

Here we are in the year 2010, property values have been decreasing rapidly in the community, and your home is now only worth $190,000. Your home is “under water”.

Is there anything you can do to reduce your mortgage payments or somehow save money because of what has happened in the real estate market?

If you file a chapter 13, you can actually reclassify your second mortgage from a secured obligation to an unsecured obligation, and this means that you can probably wipe out your obligation to pay any money whatsoever on your second mortgage.

You would save the $35,000 principle balance, and in addition you would save all of the money you would be required to pay in interest over the years, so this savings could actually be more in the vicinity of $70,000.

You can receive this benefit in a Chapter 13 in any case where the amount of money you owe to pay off your first mortgage is more than the fair market value of your home.

Let me give you another example, just to make sure you understand how it works. Your house is worth $150,000, and you owe $170,000 to pay off your first mortgage. You have the second mortgage balance of $50,000. You can reclassify your second mortgage to an unsecured claim and totally wipe out your $50,000 mortgage obligation.

Here is another example which demonstrates when this solution won’t work. Let’s say your home is worth $200,000, you have a first mortgage balance of $190,000 and a second mortgage balance of $50,000. Even though your home is “under water”, you still have to pay the $50,000 second mortgage.

The key is that the value of your home has to be less than the payoff on your first mortgage.

This can be somewhat complicated and involved, and it is always best to seek the services of a well qualified bankruptcy attorney who can assess your situation in detail and give you the best available advice.

The law is actually quite different if you are under water on a property that is not your primary residence. In fact, it is much more favorable, and you have a much better opportunity to reduce mortgage balances on investment properties. We will be dealing with these important issues in future blogs so please stay tuned.