If you have a second mortgage, the chapter of bankruptcy you file may have a large impact on your case. In a Chapter 13 bankruptcy case, a completely unsecured/underwater mortgage may be stripped off. This is not true in a Chapter 7 bankruptcy case.
How to determine if your 2nd mortgage is completely unsecured/underwater
- Request a payoff statement from your 1st mortgage company
- Request a payoff statement from your 2nd mortgage company
- Review the Just Market Value for your home on your county’s property appraiser/tax assessor website.
- Do the math. Math is hard, we get it. Calculate the following:
- Fair market value of the home MINUS
- Amount of the 1st mortgage
- If this leaves you with a negative number (meaning your mortgage is larger than the fair market value of your home), your 2nd mortgage is completely unsecured/underwater.
The Bankruptcy laws provide that in a Chapter 13, you are able to strip off/remove that completely unsecured/underwater 2nd mortgage. Under 11 U.S.C. § 506(d), permits the debtors to strip off (remove) the junior mortgages only if the claim “is not an allowed secured claim.” When the second mortgage is completely unsecured, the second mortgage’s interest is zero and the claim cannot be secured. This allows a debtor filing bankruptcy to void the second mortgage.
On the other hand, case law provides that in a Chapter 7, you may NOT strip off/remove your completely unsecured/underwater 2nd mortgage. In Bank of America v. Caulkett, 575 U.S. —, 135 S. Ct. 1995 (2015), the United States Supreme Court stated that 11 U.S.C. § 506(d) of the Bankruptcy Code “does not permit a Chapter 7 debtor to void a junior mortgage on the debtor’s property, when the amount of the debt secured by the senior mortgage on that property exceeds the property’s current market value.”
This may make a difference on the Chapter of bankruptcy you are going to file. While you may qualify for a Chapter 7 based on your income, this would make a difference if you were able to completely strip off/remove the 2nd mortgage. What you may pay for filing a Chapter 13 case may be a benefit compared to having to pay the entire 2nd mortgage on your home.