After the housing crash of the late 2000s, many homeowners were left owing more on their homes than they were worth. This is also called being “upside down”. Few people know that a Chapter 13 bankruptcy can help some people who are “upside down” on their homes.
The bankruptcy laws allow people who owe more on their first mortgage than what their home is worth to eliminate any other mortgage loans after the successful completion of a Chapter 13 bankruptcy.
Here is an example of how this works. Joe purchased his home in 2006 for $100,000.00. He obtained a mortgage loan for $95,000.00. In 2008, he obtained a second mortgage for $20,000.00. In 2014, Joe decides to file a Chapter 13 bankruptcy in order to get his debts under control. His house is now only worth $80,000.00, while $85,000.00 is owed on his first mortgage. Joe can eliminate his $17,000.00 second mortgage if he successfully completes a Chapter 13 bankruptcy.
In most areas of the country, the ability to get rid of second mortgages is only available in Chapter 13 bankruptcies, which require that you make your best effort to repay debt over a 3-5 year period. This is the case in Pennsylvania. However, the 11th Circuit Court of Appeals, which covers Florida, Georgia and Alabama, has recently ruled that Chapter 7 filers can also get rid of second mortgages if their home is worth less than what is owed on the first mortgage. Bank of America, the lender of the second mortgage in that case, has appealed the ruling and the Supreme Court has agreed to hear the case.
If the Supreme Court sides with the 11th Circuit Court of Appeals, it will expand the ability to get rid of second mortgages to the approximately 66% of bankruptcy filers that file Chapter 7 bankruptcies. This could make filing for bankruptcy very attractive for people even if they don’t have a lot of other debt like credit cards, medical bills or personal loans.
While we can’t get rid of second mortgages in Chapter 7s here in Pennsylvania yet, if you’d like to find out if you qualify to eliminate a second mortgage in a Chapter 13, give Steidl & Steinberg a call. We have helped many people eliminate their second mortgages. We look forward to hearing from you!