If you have a second mortgage on your home, filing bankruptcy can help to alleviate some of your financial burden and assist in helping you in trying to reduce your debt.
When you file bankruptcy, such as Chapter 13, your debts will be consolidated into a repayment plan. You can possibly have some debt eliminated. It all depends on what type of debt you owe and which type of bankruptcy you file. Usually, second mortgages are lower in amount than the first mortgage. Therefore, they are most likely not as high of a priority in terms of repayment to a lender.
Usually, most homeowners file Chapter 13 bankruptcy because the terms are typically better and more accommodating. Even if you do file Chapter 13 bankruptcy, it is important to know that you are still responsible for your second mortgage debt. However, since your first mortgage is based on the value of your home and if the bankruptcy court determines that you do not have the equity or assets to pay off your second mortgage; it is possible for it to be declared an unsecured debt. This allows the second mortgage to be regarded as not a high priority in terms of which debt needs to be paid off, and in some cases, it can be removed all together.
Under Chapter 13, a repayment plan will be decided by you, your creditors, and the bankruptcy court that is agreeable and accommodating to your financial situation. The plan typically is set up for three to five years. After this period of time, any unsecured debt, such as a second mortgage, will be eliminated.
Chapter 7 bankruptcy is another option; it typically cancels all secured debt owed due to your home mortgage. Chapter 7 bankruptcy is usually best for homeowners that want to sell their home. It allows for you to spend time in your home while your bankruptcy case is taking place. However, it does not stop foreclosure proceedings on your home or relieve you from a tax lien or liability against your property.