One of the most important issues for many Ohio debtors considering bankruptcy is protecting their homes from possible foreclosure. In some cases, a person’s residence may be encumbered by both a first and second mortgage. While the person may be able to afford paying the first mortgage, if they are unable to pay the second mortgage the secondary lender may be able to us a lien to initiate foreclosure proceedings.

While a bankruptcy petition will stay foreclosure proceedings for a time, secured creditors, such as mortgage lenders, will be able to enforce their liens against the property. Under Chapter 7 liquidation, the second mortgage lender’s security interest in the property is not destroyed, and the second mortgage held will not be discharged in the bankruptcy.

Chapter 13 bankruptcy, however, does carry the potential for destroying the mortgage lender’s property lien. In some cases of Chapter 13 bankruptcy, the secondary lender’s interest is converted into an unsecured debt. As long as the debtor then makes all of his or her required payments to the bankruptcy estate according to their approved repayment plan of three to five years, the remaining unsecured debt will be discharged at the end of the plan period. If a person has a second mortgage, then when the Chapter 13 bankruptcy estate is closed, they will no longer have the responsibility to pay that sum.

Chapter 13 bankruptcy is known as reorganization because it assists the debtor by allowing them to reorganize debt. This process can be complicated, and making a plan that would be approved by the courts may be difficult. Those seeking a bankruptcy under chapter 13 may benefit from discussing their case with an attorney who is familiar with such proceedings.

Source: SF Gate, “How to Strip Away a Second Mortgage Through a Bankruptcy“, Tony Guerra, December 08, 2014