Discharge of a Second Mortgage

A second mortgage is secured by any equity remaining after the first mortgage is paid off.

With the burst of the housing bubble in 2008 and 2009, many homeowners owe more on their homes than they are worth. The second mortgage is often the reason.

Securing a Second Mortgage

If a home has two or more mortgages, both mortgage holders have a lien or security interest in the home. This means that the owner can't sell the home and give clear title unless they pay both mortgages. This is easy when the selling price is higher than the value of the outstanding mortgages.

When the Value Drops

In times when housing prices go down, the value of a home can drop below the first mortgage's outstanding balance. This leaves the second mortgage unsecured. If you stopped paying the second mortgage, and the mortgage holder foreclosed and sold your home, it would not receive anything because the proceeds of the sale would pay the first mortgage first. If this happens, there are no proceeds left to pay the second mortgage.

Lien Stripping or Discharge

When homeowners have a second mortgage that is not secured by the value of the home, they are still responsible for the debt. If they file Chapter 13 bankruptcy, the trustee may allow them to do a lien strip. The trustee includes the second mortgage amount in the payments that the unsecured creditors receive and the court eliminates the lien against the property. When the repayment period is over, the court discharges the remaining balance of the loan.

References

• Bankrate.com: Bankruptcy May End Second Mortgage Woes

Resources

• Nolo: Bankruptcy, Foreclosure, and Debt