After completing a Chapter 7 Bankruptcy, you still might not have been able to clear the debt from your second mortgage or HELOC. Two mortgages can seem like overwhelming expenses after you’ve just come through bankruptcy.
You may wonder if you can keep your house while paying towards only one loan. The good news is that you may be able to negotiate a settlement or loan modification on your second mortgage to allow for some breathing room.
How to Get Rid of Second Mortgage After Chapter 7
A second mortgage is a loan made in addition to the first mortgage on a home. The money is borrowed against the home’s current equity. Equity is the difference between what is owed on the home and the home’s value.
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A second mortgage could come in the form of a home equity line of credit or HELOC for short. Second mortgages are for less money than the original home loan and they usually carry slightly higher interest rates.
People turn to second mortgages to enable large purchases because the interest rates usually prove to be lower than a personal bank loan or credit card interest rates. It’s important to keep in mind that borrowers will pay upfront closing costs on second mortgages as they did with their first mortgages.
Second Mortgages After Chapter 7 Bankruptcy
Chapter 7 Bankruptcy filers can earn a discharge from qualifying debt at the end of the process, but their mortgages remain intact. Filers may want to keep their homes by continuing to pay their original mortgages, but paying towards that second mortgage may prove to be a financial back-breaker.
There are strategies to try to help you and your family get out from under a second mortgage. Some methods might allow the filer to greatly reduce the balance owed, and other options can refinance the loan at a much lower rate with lower payments.
Settling Your Second Mortgage
Homeowners emerging from a Chapter 7 Bankruptcy may still feel like they are being hit from all directions. They may have two mortgage payments to worry about while trying to keep their home and rebuild their credit. Getting rid of that second mortgage often makes a huge difference in the chances of bankruptcy filers rebuilding their finances and avoiding another round of bankruptcy.
Debtors with a second mortgage can attempt to contact the lender and negotiate a settlement at a reduced amount. The bank doesn’t have to settle with you or remove the lien on the home.
However, it might be beneficial to the lender to work out a new agreement, especially if the loan is now worth more than the home. When the value of the home is high and exceeds the balance left on your first mortgage, there’s less chance your second mortgage lender will be willing to negotiate.
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Second mortgage lenders could decide to foreclose on the loan, but in some cases, they might not be able to sell the home until working out an agreement with the lender on the first mortgage. A settlement also allows the second mortgage lender to avoid expensive legal fees involved in a foreclosure.
To begin the settlement process, borrowers would call their banks and discuss their situation. The debtor would make an offer, and the bank may make a counteroffer. Settlement agreements may fall as low as 5% to 10% of the value of the second mortgage. The lump-sum settlement may leave you digging into your 401K savings or selling off property, but the benefits of getting rid of the monthly payments may be worth it.
Refinancing or Modifying Your Second Mortgage
If your credit score is strong enough, you may be able to secure a new loan at a better interest rate and drastically cut your monthly payments on a second mortgage. After a Chapter 7 Bankruptcy, you may need to wait to rebuild your credit score in order to get a favorable loan rate.
If your second mortgage lender doesn’t want to settle for a lump sum, you may want to ask if they’ll modify your current loan. They may restructure your loan or adjust the interest rate in order to keep getting payments.
Contact a Los Angeles Bankruptcy Lawyer Serving Southern California
People facing financial uncertainty may turn to a second mortgage in an attempt to get some breathing room. This move can not only push them towards bankruptcy sooner, but they may also be unable to clear the debt in bankruptcy.
Trusting your bankruptcy to an experienced and skilled bankruptcy attorney is the best way to get the biggest benefit out of your Chapter 7 filing. A local bankruptcy lawyer also makes sure you don’t find yourself with more debt than you can handle even after you earn relief in a Chapter 7 discharge.
Keeping your home through bankruptcy is likely a top priority for you and your family. Find out how to best handle your mortgages in bankruptcy, hang on to your home, and earn yourself some breathing room on the other side.
When you have questions about the best path for you, take advantage of a free and confidential bankruptcy consultation. Reach out to the Law Offices of Steers & Associates and ask any questions you have and find out where you should go from here.
Elena Steers is a highly experienced bankruptcy attorney, the founder of Law Offices of Steers & Associates, and previously worked as a Bankruptcy Trustee Assistant at the Office of the Chapter 13 Trustee in Los Angeles. Her current affiliations include the State Bar of California, National Association of Consumer Bankruptcy Attorneys, and Central District Consumer Bankruptcy Attorneys Association.