Old Second Mortgages
– ‘The Dreaded ZOMBIE Second Mortgage’ (wait – it’s NOT dead!)
Recently I spoke with a potential client who had filed chapter 7 bankruptcy years ago. They mistakenly believed that their second mortgage was “taken care of” in their prior chapter 7 bankruptcy. No payments were made for years – they had not heard from the second mortgage – and thought it was gone. Then – BAM – they received a notice of arrears, which later lead to the filing of a notice of default – with the second moving towards foreclosure.
A Chapter 7 bankruptcy can be a powerful tool to eliminate dischargeable unsecured debt – but it does not affect consensual liens you have placed on your property – such as a second mortgage or home-equity line of credit (HELOC). “Consensual” means you agreed to the secured claim. This is to distinguish such claims from non-consensual liens, such as a judgment lien.
So what can a homeowner do in such a situation?
The first step in assessing options for dealing with an ignored second mortgage is valuing your residence. It is important to determine the value of the house in its current condition. Merely going online may result in a value that reflects what prices are around you and NOT your particular house. The other thing to beware of is a valuation that is too low based on your residence location and condition – the old “what do you WANT the value to be?” Relying upon a suspect valuation will only present problems later when challenged.
If the value of your residence is BELOW what is owed on the first mortgage – the homeowner could file a chapter 13 bankruptcy and incorporate a motion to value in their reorganization. This allows the homeowner to present evidence of the value of their home and proof of the first and second mortgage. Upon a showing that the first mortgage is higher than the value of the residence – the second mortgage or other junior consensual liens would be treated as unsecured claims. There are many more details to a successful chapter 13 – and each person’s situation is unique. There may very well be tax liabilities or other issues that could complicate using a chapter 13 as a means to handle a second mortgage.
If the value of the residence is ABOVE what is owed on the first mortgage – then perhaps, if the numbers work out, filing a chapter 13 could allow a homeowner to catch up on the payments missed. Such a solution is very dependent upon the specific circumstances in each situation.
One of the most important take-aways from this discussion is for a homeowner to not IGNORE a zombie second mortgage – investigate, research your home value and consult with experienced professionals to craft a strategy to ADDRESS the old mortgage. With over TWENTY YEARS experience in bankruptcy court I have dealt with this issue – but do not assume this means I can wave a magic wand and create new realities. My office can assist you in assessing the facts of your specific situation and discuss options available.
COVID-19 update: In these unprecedented times we MIGHT see a reduction in real estate values. IN THAT EVENT – homeowners who previously would not qualify for relief from a second mortgage in chapter 13 MAY NOW QUALIFY. This is highly fact dependent – so this is evolving. Obviously, I am NOT predicting the future – merely noting possibilities. Anyone who KNEW the future of real estate in Southern California would have a HUGE advantage – sadly, that is not me!