How to Get Rid of Your Second or Third Mortgage and Line of Credit in a Bay Area Bankruptcy

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One of the few benefits of the recent foreclosure meltdown for homeowners is how second or third mortgages and lines of credit can be treated in a Chapter 13 bankruptcy when the value of their house is less than what is owed on the first mortgage.   When the value of a house is below what is owed on the first mortgage, then the second or third mortgages or a line of credit are not secured by any value in the house. Unfortunately, this means that your house has decreased in value significantly.   The good news is that you can get rid of the second mortgage, third mortgage or line of credit when filing a Chapter 13 bankruptcy.

Value of House =                                          $700,000 at time of purchase
Amount Owed on First Mortgage =               $550,000 at time of purchase
Amount Owed on Second Mortgage =           $100,000 at time of purchase
Amount Owed on Third Mortgage =              $50,000 at the time of Purchase

Total owed on all mortgages at time of purchase is $700,000

After four years of decreasing home values the same house purchased for $700,000 is now only worth $500,000.  This means if the house were sold or foreclosed on today the second and third mortgages listed above would get nothing given the house is only worth $500,000 and the amount owed on the first mortgage is more than that, $550,000.

So, when the circumstances above exist, and a Chapter 13 bankruptcy is filed, the second and third mortgages or a line of credit can be valued at zero and the liens securing the payment of the second and third mortgages or line of credit can be stripped from the property and can be treated as unsecured debts.  Instead of having to pay the second and third mortgages or lines of credit in full as secured debts, these debts are treated like all the other unsecured debts in the case such as credit cards or medical debts.  Once the Chapter 13 bankruptcy case is filed, the filer will only be required to pay the first mortgage and their other living expenses along with the Chapter 13 Plan payment.  If the Chapter 13 Plan calls for only paying 5% of the unsecured debts, than the other 95% of the unsecured debt is discharged at the end of the Chapter 13 Plan, including the second and third mortgages or line of credit.

In short, when filing a Chapter 13 bankruptcy case, and the value of your house is less than what you owe to the first mortgage holder, you will not have to pay the second or third mortgage or line of credit if your Bankruptcy Attorney correctly files your case.