Filing Bankruptcy, Foreclosure and Second Mortgages

Business and finance press watchdog Dean Baker of Beat the Press analyzes a NYTimes report indicating that in some hard-hit areas, foreclosures exceed home sales.  Pretty wow.

Here's the sentence that intrigued me:

In fact, the percentage [of foreclosures] that do result in sales are likely to be higher today than in the past because fewer mortgage holders will bother with foreclosure proceedings on second mortgages.

The question of second mortgages is an interesting one.

Of course, just like first mortgages, your bank has every right to start a foreclosure proceeding on your second mortgage.

Bankruptcy and Your Second Mortgage

Baker's point is that some mortgage lenders in certain areas of the country (he mentions Las Vegas and Florida, two of the hardest-hit) won't bother with foreclosing on second mortgages because they don't stand to recover anything after the first or primary mortgage is dealt with.

Second mortgages are often unsecured loans, just like home equity loans; this means that when home prices have plunged, the owner is stuck with a loan that's not backed up by any tangible asset.

Unsecured debts like this can be eliminated in Chapter 13 bankruptcy, which strips any excess unsecured debt that exceeds the actual value of your home.

Your second mortgage would likely exceed the actual value of your home, and therefore that debt would function like any other debt (credit card, etc).

There's the impetus behind the "recycling" of these foreclosed homes: if the debt can be stripped, the lender likely won't pursue getting that non-existent money back and will make what it can from the housing market.  Which, these days, isn't much.

For more on filing bankruptcy and second mortgages, talk to a bankruptcy lawyer near you!

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This entry was posted on Thursday, March 6th, 2008 at 9:52 am and is filed under Home Foreclosure. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

2 Responses to “Filing Bankruptcy, Foreclosure and Second Mortgages”

  1. Niloofar says:

    I live in FL and own a home which worth 230000.I have a 1st mortgage on the home for 167000 and a 2nd one for 196000. I can not pay the 2nd one. If I file for bankruptcy can I get rid off the 2nd one or should I wait for 2nd one to go for foreclosure and then file for bankruptcy. By the way I am behind the payment for 2nd one for 2 months and current for 1st one.
    Thanks,

  2. sherry says:

    Can you file BK ON SECOND MORTGAGE AND NOT THE FIRST MORTGAGE AND KEEP YOUR HOME AND PAY YOUR FIRST MORTGAGE LIKE YOU HAVE BEEN DOING?