Some Californians use Bankruptcy to Shed Second Mortgages
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Some Californians use Bankruptcy to Shed Second Mortgages


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Some Californians have filed for bankruptcy in order to be rid of their second mortgage debt.

Some Californians have been able to eliminate their second mortgages by using a little known provision of the bankruptcy code.

Many California residents who have been facing financial hardships as a result of the recession are taking advantage of a little known provision of the bankruptcy code to get rid of a second mortgage and avoid foreclosure, according to the San Jose Mercury News.

The newspaper said bankruptcy lawyers report that the provision has been used in at least hundreds of bankruptcy cases in the Bay Area over the past two years. Although bankruptcy laws prevent homeowners from eliminating the debt from their first mortgage if they plan on staying in the home, second mortgages can be classified as unsecured debt when there is no equity to cover them.

A local bankruptcy lawyer told the paper that the practice has allowed many people to keep their homes and pay down enormous debts.

"This is a really big-ticket issue that allows people to keep a home and conform the mortgage to something closer to real value," she said.

However, the source reported that some mortgage lenders say the practice is a "troublesome phenomenon" but there is nothing the mortgage industry can do to stop it aside from changing the law.

According to the U.S. bankruptcy court, California had the fourth-largest amount of personal bankruptcy petitions in the 12-month period ending March 31. The state had 7.05 filings per 1,000 population.

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