Dear Dr. Don,
I have two mortgages and was able to get my first mortgage modified. Now, the people who helped me with the modification are telling me that I should not worry about the second mortgage even though the bank is still sending me bills every month. They say because the second mortgage is an unsecured loan, the bank cannot foreclose on the house.
It's been six months now since I made my last payment. I want to know if you have heard of this before, or if it would be better for me to try to file a Chapter 13 bankruptcy? The first loan was for $472,000, and the second loan was for $118,000. The house is now worth $465,000, and that is a high estimate. Could you please give me some advice?
-- Hugo House-Payments
The second mortgage lender can foreclose on the property. But there's just not much point in doing so when the first mortgage loan gets paid off first before the second mortgage lender gets any money. If the house is appraised for less than the first mortgage balance, there's no money for the second.
The obligation to repay the second mortgage doesn't go away on its own. You still owe the money. The missed payments on your second mortgage will stay on your credit report for seven years from the date of the first missed payment. A Chapter 13 bankruptcy may help you get out from under the second mortgage. Here's what the NOLO.com Web site says about it:
Chapter 13 may also help you eliminate the payments on your second or third mortgage. That's because if your first mortgage is secured by the entire value of your home, which is possible if the home has dropped in value, you may no longer have any equity with which to secure the later mortgages. That allows the Chapter 13 court to "strip off" the second and third mortgages and recategorize them as unsecured debt -- which, under Chapter 13, takes last priority and often does not have to be paid back at all.
It's much easier to hold on to the house with a Chapter 13 bankruptcy compared with a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, you establish a court-approved repayment plan that lasts for three to five years. If you complete the repayment plan, the court will discharge any remaining eligible debts. Most Chapter 13 bankruptcy petitioners, however, don't successfully complete the repayment plan.
I wouldn't recommend a do-it-yourself approach to a bankruptcy filing. Work with a bankruptcy attorney to determine if bankruptcy is right for your situation. Alternately, you could negotiate with the second mortgage lender to accept less than the outstanding loan balance as payment in full on the mortgage.