What Happens to my 2nd Mortgage/Home Equity Loan in Ch. 7 Bankruptcy?

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. In general, 2nd mortgages or HELOCs are loans that are given to property owners. These loans are secured by the value of the property above the amount of the first mortgage. The difference between what the property is worth and what the amount of the first mortgage is called “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, most 2nd mortgages that were issued between 2004 and 2008 are no longer secured by the Equity because that equity is gone. 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. In Ch. 7 Bankruptcy, nearly all unsecured loans can be discharged, including 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 that was used to obtain the 2nd mortgage/HELOC, then you will eventually have to address the lien 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 and you should call my office (954-484-9987) for a free consultation for detailed information relating to your particular circumstances.