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What Happens to Second Mortgages in Chapter 7 Bankruptcy?

Many people wonder what happens to a second mortgage or home equity loan in a Chapter 7 bankruptcy.

Every case is unique. Ask a lawyer about your second mortgage and potential bankruptcy filing.

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What Usually Happens to a Second Home Loan During a Chapter 7 Case?

Here's a look at how most mortgages are treated in Chapter 7 bankruptcy.

  • Chapter 7 may cancel unsecured mortgage debt: The good news about second mortgage loans in Chapter 7 bankruptcy is that they may be canceled by the bankruptcy court, especially if you owe more on the primary mortgage than the home is worth. If you plan to surrender your home to the lender, Chapter 7 may also cancel the debt you owe on a primary mortgage loan, thus leaving you free mortgage debt once you receive your bankruptcy discharge.
  • Chapter 7 may not be able to prevent foreclosure: The bad news is that because you will no longer be responsible for repaying your primary or secondary mortgage loans, you typically will no longer be able to keep your house. The mortgage agreement is a contract saying that you will either make payments on the loan or surrender the property connected to it (the house). Most people wanting to stop foreclosure lean toward filing a Chapter 13 bankruptcy petition, which halts foreclosure and allows debt to be repaid over time.
  • Chapter 7 often moves quickly: Chapter 7 cases tend to wrap up within three to six months of filing, meaning that you could be delivered of your mortgage and other debt obligations less than a year after you file your case. This period of time may be sufficient for you to find alternate housing, and for some people, it provides a time cushion in which they can save enough money to make the necessary security deposit on a rental apartment or house.

Who Can File for Chapter 7 Bankruptcy?

One important thing to keep in mind about Chapter 7 bankruptcy is that only certain people qualify for Chapter 7 protections.

Specifically, if you make too much money (compared to the other earners with families of your size where you live), you may not be eligible for Chapter 7's protections.

But don't worry: if you cannot file for bankruptcy under Chapter 7, you may be able to file under Chapter 13.

But keep in mind, while Chapter 13 bankruptcy is often used by homeowners in foreclosure, it's not right for all filers. For one, it requires a steady income and committing to a repayment plan of up to five years.

Learn More from a Bankruptcy Lawyer

If you'd like some more details about mortgage loans in Chapter 7 bankruptcy, you can take advantage of this opportunity to connect with a bankruptcy lawyer practicing in your area for a free consultation.

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