Many clients are concerned with what will happen to their second mortgage (also referred to as a Home Equity Loan, Home Equity Line of Credit or HELOC) during and after Chapter 7 Bankruptcy.
What is Second Mortgage?
In general, second mortgages or HELOCs are loans that property owners get. The value of the property above the amount of the first mortgage secures these loans. The difference between what the property is worth and what the amount of the first mortgage is “Equity.”
That is why these loans are often referred to as “Home Equity Loans.”
In short, you are borrowing against the equity in the property.
With the state of the current economy and housing market here in South Florida, Equity no longer secures most second mortgages that were issued between 2004 and 2008. That is because that equity disappeared. When the price of the property drops below the balance of the first mortgage, the equity that was securing the loan evaporates. And, the loan becomes unsecured. An unsecured loan is essentially a loan that is not tied to any real or personal property.
Ch. 7 Bankruptcy
In Ch. 7 Bankruptcy, nearly all unsecured loans can go through dischargement. This includes your personal obligation to make payments on the 2nd Mortgage/HELOC. However, the lien from the 2nd mortgage will stay with the property. If you plan on keeping the property used to obtain the 2nd mortgage/HELOC, then you will eventually have to address the lien. This is if and when you decide to sell the property. However, if you surrender the property or lose it after a foreclosure sale, the remaining lien should have little or no importance to you. Of course, every situation is different. So, you should call my office (954-484-9987) for a free consultation for detailed information relating to your particular circumstances.