Can you get rid of a second mortgage by filing bankruptcy?

There is no doubt about it, we are living in an interesting time. One of the few advantages of a down economy is that, under the proper circumstances, people with two mortgages can actually eliminate their second mortgage through a Chapter 13 bankruptcy. Getting rid of a second mortgage, also known as "lien stripping" or "lien avoidance", can be done when the value of the property is less than the value of the first mortgage.

The logic is simple. In a bankruptcy, there are "secured" and "unsecured" creditors. A secured creditor has collateral securing its loan, while an unsecured creditor does not. A mortgage company is a secured creditor because it secured the loan with the house. A credit card company would be an unsecured creditor because it has no collateral securing its loan. When people file a Chapter 13 bankruptcy, they must repay the past mortgage arrears 100%. Unsecured creditors may not be getting 100% of their debt paid. When the case is over, any debt owed to an unsecured creditor is discharged.

To get rid of the second mortgage, an attorney files a Motion with the Court asking to "avoid" the second mortgage. The basis for filing is that under the law if there is no equity for the second mortgage, the second mortgage may be avoided. If the Court agrees with the Motion, it moves the second mortgage from the "secured" column to the "unsecured" column. When the bankruptcy is over, the second mortgage gets wiped out along with the credit cards and other unsecured debt. The Order avoiding the second mortgage and the discharge from bankruptcy must be recorded in the Land Records where the property is located.

It is important to understand all options available before taking the step of filing a bankruptcy. Nobody wants to file a bankruptcy, but if you do file, make sure you only have to do it once. An attorney can assist in maximizing the benefits.

Seth W. Diamond is an attorney at Laura Margulies & Associates, LLC. in Rockville, Maryland. His firm represents individuals and companies in bankruptcy and litigation matters in Maryland and the District of Columbia.