What Can You Do in Bankruptcy When You Have Multiple Mortgages?

This personal bankruptcy question was posted on the internet in 2011 in a bankruptcy discussion: “I have multiple mortgages, what can I do?”

If the debtor is asking about multiple mortgages on one home or if the debtor is asking about mortgages on more than one property, the bankruptcy question can be answered, although be it differently.

In either case, what happens to the mortgages depends on what type of bankruptcy you file. There are basically two types of bankruptcies most individuals can file- a Chapter 7 or a Chapter 13.

A Chapter 7 bankruptcy, commonly called liquidation of your assets, is normally the simplest and quickest form of bankruptcy. A trustee that is appointed by the court will gather and sell your non-exempt property, and he will use the proceeds from the sale in order to pay your creditors.

A Chapter 13 bankruptcy, commonly called a wage earner’s plan, enables individuals with regular income to develop a plan to repay all or part of their unsecured debts over three or five years.

Bankruptcy and multiple mortgages on one property.

When you own two mortgages for the same property, there is a primary lien and a secondary lien on the property. The primary lien holder is the one who loaned you money to buy the property in the beginning.

In a Chapter 7 bankruptcy, any secondary mortgage will be turned to an unsecured debt if the value of the home has dropped below the value of the primary loan. The unsecured loan will be prioritized according to bankruptcy law, and what the liquidated assets cannot pay on the debt will be discharged. The secondary lien will remain but the loan value will be gone.

In a Chapter 13 bankruptcy, any secondary lien will be turned into an unsecured debt if the value of the home has dropped below the value of the primary loan. If this happens, the secondary lien can be stripped. This unsecured debt will be prioritized just like in a Chapter 7 but the difference is that it will be part of the pay back plan like any other unsecured debt. You will have to pay back as much of the debt in the time frame allowed with the disposable income designated as part of your plan.

Bankruptcy and multiple mortgages on more than one property.

In this case, each property will have its own primary lien holder. Any secondary lien is treated like secondary liens on one property. Mostly, multiple properties raise legalities over state and federal exemptions.

In a Chapter 7 case, most property not considered your homestead is treated as non-exempt property and subject to being liquidated. Each primary mortgage on non-exempt property will most likely be liquidated if there is equity in the property, or the court can allow it to be foreclosed at some point if there is no equity in the property and you have defaulted on the loan.

In a Chapter 13 case, the non-exempt properties that have a mortgage are treated like any other secured properties. If you want to keep the property you have to catch up on all of your payments and still make the payments to your plan. Any secondary mortgages on investment property can be stripped.

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