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R. Flay Cabiness, II, P.C. Georgia Lawyer Blog

Will Bankruptcy Affect My Second Mortgage?

Most people considering bankruptcy worry about how filing will affect homeownership and their mortgage. But what if it’s a second mortgage causing you concern? Are second mortgages handled the same as primary mortgages in bankruptcy?

What’s the Point of a Second Mortgage?

People get second mortgages for a variety of reasons. Sometimes it’s to ease financial burdens, while other times it’s to help them afford something they wouldn’t otherwise be able to afford. For instance, second mortgages are a common tool for funding home improvements.

But what happens if you hit a financial snag after you’ve borrowed against your home?

When you assumed the second mortgage it might have had affordable payments, but if something changes it’s possible you’ll be left with the challenge of paying these payments in addition to your regular mortgage. And if your financial woes drive you into bankruptcy, you’ll be missing second mortgage payments along with other debts.

If you’d like to know more about second mortgages and the pros and cons of securing one, check out this article from thebalance.com.

Second Mortgages Can Be Eliminated in Bankruptcy

The good news is second mortgages can be eliminated when you file for bankruptcy.

An experienced bankruptcy attorney can use a provision in bankruptcy law to eliminate second mortgages and stop foreclosure. It’s believed to be a common practice and many homeowners have used it to avoid losing their homes.

Chapter 13 is the most common type of bankruptcy chosen by homeowners. In Chapter 13, a repayment plan is created to pay back much of your debt, but unsecured debts are often discharged. And since second mortgages are considered unsecured, it’s possible to have a second mortgage discharged.

Underwater Homeowners

Up until recently, it would’ve been unheard of for a bank to lend more money to a homeowner than their home is worth. However, as the housing bubble of the early and mid-2000s grew bigger, many homes were valued at far more than they were really worth. People were able to buy these homes because banks were approving overinflated mortgages on homes that were worth just a portion of their on-paper value.

Discharging second mortgages has been an effective tool for homeowners who are underwater, which means they owe more on their homes than it’s worth on the market. Once they complete their repayment plan in Chapter 13 bankruptcy, their second unsecured mortgage is eliminated and they are able to start fresh with reasonable mortgage payments they can afford.

Lenders aren’t happy with the ability of homeowners to have their second mortgages discharged, but since they played a part in the housing crash that eventually occurred, there isn’t much they can do. And this option has been a part of bankruptcy law for a long time – it just hadn’t been commonly used until recently.

If you are considering bankruptcy and you’re concerned about foreclosure, and you have a second mortgage, it’s important to speak to an attorney who has experience dealing with second mortgage issues.

To learn more about second mortgages and how you can deal with them when filing for bankruptcy, contact R. Flay Cabiness, II, P.C. at (912) 554-3774 (Brunswick, GA); (912) 375-5620 (Hazlehurst, GA) or; (912)-554-3756 (Jesup, GA).

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Brunswick, GA 31520
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Hazlehurst, GA 31539 
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Jesup, GA  31545
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