It is possible to eliminate a second mortgage through bankruptcy

Things can get tricky when filers have second mortgages or home equity lines of credit (HELOCs) when they file for bankruptcy. And thanks to the housing market that collapsed in 2007, many Americans currently do have multiple mortgages or loans attached to their homes.

A common misconception is that mortgage liens can not be removed through bankruptcy. In fact, 2nd mortgages (and HELOCs) CAN be stripped and/or discharged through bankruptcy.

Here’s how they’re treated by the bankruptcy court:

• A HELOC in Chapter 13 bankruptcy: In Chapter 13, filers are required to make payments to their primary mortgage lender and to the bankruptcy trustee. The trustee distributes these payments among priority debtors. After the case concludes, the HELOC may be eliminated (discharged). The lender will have gotten a percentage of trustee payments during the case.

• A HELOC in Chapter 7 bankruptcy: Chapter 7 may cancel the debt on a home equity credit line, but it cannot cancel the lien that creditor has on the house. In fact, a HELOC lender may still be able to foreclose on a filer’s house after bankruptcy is over (though if there’s no equity in the house, this would be unlikely). One way to avoid post-Chapter 7 foreclosure is to reaffirm payments to a HELOC lender in during bankruptcy.

• Second mortgages in Chapter 13: Second mortgages that are no longer secured by a home’s value can be discharged in Chapter 13 bankruptcy. Underwater homes may have second or third mortgages that are not secured any longer by the house’s value (that is, the amount of the loans totals more than what the house is currently worth). However, discharging a second mortgage will not affect what a bankruptcy filer owes on a first mortgage.

Brian Cahn,

Senior partner with Perrotta, Cahn & Associates

Perrotta, Cahn & Associates represents clients throughout Georgia and the Southeastern United States.  We have offices conveniently located throughout Georgia.  To schedule a free consultation with a lawyer at our firm, call us toll-free at 866-382-8900 or visit us online at www.northgabankruptcy.com.

We have offices in: Cartersville, Calhoun, Dalton and Dallas

Serving clients in: Bartow, Floyd, Paulding, Cherokee, Polk, Whitfield, Douglas, Cobb, Fulton, Chatham, and all of Northwest Georgia.

Should you sign a reaffirmation agreement?

One of the benefits of a Chapter 7 bankruptcy, is the ability to keep (or “reaffirm”) debts secured by property the debtor needs for his or her fresh start.  Typically, clients need their vehicle and house and reaffirming the loans on those items seems like the right thing to do.

Maybe.  Maybe not.

More often than not, I will advise clients NOT to reaffirm their mortgage loan, especially under the following circumstances:

• (1) if there is a 2nd mortgage;
• (2) if my client is self-employed or has fluctuating pay; or
• (3) if the property has little or negative equity.

Under the new bankruptcy laws, a mortgage company could foreclose on the property if a reaffirmation agreement is not signed, even if the debtor is current with their mortgages (I will blog about ipso facto clauses in the near future).   However, in 17+ years of bankruptcy practice, I have never seen a mortgage company attempt to foreclose when a reaffirmation is not signed and the debtor remains current.  The chances are very slim that the mortgage company would want to foreclose when the loan is current, especially in today’s real estate market.  By not signing the reaffirmation agreement, the debt would be discharged and would show up on the credit report as being discharged.  But as long as the debtor continues making regular mortgage payments, there is a great chance that they would be able to keep the property, and own it outright at the end of the loan.  There is no guarantee, but chances are very good that the mortgage company would never foreclose if the account remains current.  And in two to three years after the bankruptcy, the borrower could qualify to refinance their house!

Another debt that most individuals may want to reaffirm is a car payment.  I will typically advise my clients to reaffirm their car payment IF they’re one-thousand percent certain they can afford the payment; the car is worth at least what’s owed; and the account is current.   If a debtor wants to keep their car through the bankruptcy, they probably need to sign a reaffirmation agreement.  Car creditors, unlike mortgage companies, can and do repossess collateral (the car), even if the payments are current, but a reaffirmation agreement is not signed!  Why?  The new bankruptcy laws gives the creditor this remedy.  Why are they doing it?  It could be to go ahead and cut their loses?  Or, as I believe, it could be a way for them to scare debtors into signing the reaffirmation agreement.  Some debtors may need to sign a reaffirmation to keep their car, but usually most individuals can and do qualify to purchase another vehicle soon after their bankruptcy is over.  Therefore, one should really think twice before signing a reaffirmation for their car.

Other secured debts that my clients like to reaffirm are furniture loans, or loans for jewelry or a computer (typically Dell Financial).  Again, I also advise them NOT to sign reaffirmation agreements for these items.  If a reaffirmation is not signed on a furniture debt, the debt is discharged and the only recourse for the creditor is to pick up the furniture.  What are the chances that the creditor will pick up their furniture.  Very, very, very slim.  The reason is simple.  Most furniture depreciates as soon as you take it out of their store.  Further, the creditor can not sell used furniture for more than what it would cost them to pick it up.  So, the best course of action is to NEVER sign a reaffirmation for a furniture debt and take the chance that they do not come and pick up the furniture.

What about loan companies that made you pledge everything of value as collateral for the loan?  Do NOT reaffirm this loan.  The Bankruptcy Code gives us the ability to avoid the finance company’s lien on your household items.  Yes, we can eliminate the loan, and you keep your household items.  I will explain the details to you at your free consultation.

All in all, the only two debts that consumers should ever consider reaffirming are their house or their car.  The main objective is to avoid biting off more than you can chew.  Sure, reaffirming the debt helps your credit and will guarantee that the lender won’t take your car or home as long as you stay current.  But the risk of future financial problems frequently outweighs the benefit of reaffirmations.

Brian Cahn, senior partner with Perrotta, Cahn & Associates

Perrotta, Cahn & Associates represents clients throughout Georgia and the Southeastern United States.  We have offices conveniently located throughout Georgia.  To schedule a free consultation with a lawyer at our firm, call us toll-free at 866-382-8900 or visit us online at www.northgabankruptcy.com.

We have offices in: Cartersville, Calhoun, Dalton and Dallas

Serving clients in: Bartow, Floyd, Paulding, Cherokee, Polk, Whitfield, Douglas, Cobb, Fulton, Chatham, and all of Northwest Georgia.