Bankruptcy sucks. Even the most well-meaning and responsible of people can get into a bad situation -- medical bills, loss of employment -- and find themselves on the road to financial ruin. When it comes to mortgage debt, the basic rule of thumb is that lenders generally want you to stay in your home and continue to make payments. Although it's certainly possible that you'll lose your home in a bankruptcy proceeding, it's not inevitable.
Can a Bankruptcy Judge Void a Mortgage?
Whether you file for Chapter 7 bankruptcy, which throws out most of your debts and liquidates any relevant assets, or Chapter 13, which creates a structured repayment plan, a judge cannot simply "void" a mortgage. A successful bankruptcy may dissolve your personal liability for the mortgage debt, but the lender's lien on the property still exists and is still enforceable.
In other words: If you're $10,000 behind on a $100,000 mortgage, a bankruptcy judge can free you of that delinquent $10k, but you still have a mortgage. If bankruptcy gets you back on your feet, and you pay on your mortgage, then you're fine. But if you fall behind on your mortgage after bankruptcy, then the lender could foreclose on the house.
A lender will always file a lien against your property to protect its investment in the original loan. Although bankruptcy can serve as a "reset switch" of sorts, the bankruptcy judge will not invalidate the lien. Even if you manage to get all your mortgage debt resolved, you'll still have to work with your lender to release the lien if you ever want to sell or transfer the property.
Can I Keep My Home & Release Second Mortgage Debt Through Bankruptcy?
It's possible to keep a home and discharge the debt associated with a second mortgage, but because bankruptcy is an all-or-nothing prospect, your primary mortgage will also be affected. Both forms of personal bankruptcy protection will require a complete list of assets and liabilities, which are reviewed by a court-appointed trustee. The trustee will evaluate what assets can be sold off to pay creditors, but there are some exemptions in place for homes. These can vary by state and under federal guidelines. If there's no equity in the home, the trustee will likely let you stay in the home and if you continue to pay the mortgage the lender will not foreclose on you.
Can You File Bankruptcy After Doing a Making Home Affordable Program?
The federal Making Home Affordable plan does not stop you from filing for bankruptcy, nor does a bankruptcy filing disqualify you from the program. The Making Home Affordable Plan and the Home Affordable Modification Program both try to avoid foreclosure on a home, even if you're contemplating bankruptcy.
Can a Second Mortgage Be Filed Under Chapter 13 Bankruptcy?
If you are in Chapter 13 bankruptcy, you generally will not find a lender willing to approve a second mortgage. Although no law or bankruptcy regulation prohibits a second mortgage, most lenders will view an active bankruptcy as a significant credit risk and so will not agree to a second mortgage. Generally speaking, it's better to let the trustee managing the Chapter 13 bankruptcy process to work through a payment plan than to try to get a second mortgage to help pay down other debts on your own initiative.
Jason Gillikin is a copy editor and writer who specializes in health care, finance and consumer technology. His various degrees in the liberal arts have helped him craft narratives within corporate white papers, novellas and even encyclopedias.