The Huffington Post has a good article that will undoubtedly be of help to some home owners. Quoted below are the most relevant sections of the article
Flying under the media radar, the right to discharge a second mortgage in a Chapter 13 bankruptcy provides a glimmer of hope to homeowners stuck with a foreclosure because they own a home they can’t afford and can’t sell. With one in 10 Americans out of work, while others have suffered a pay cut as a condition of keeping their jobs, the amount of disposable income available to pay a mortgage is not what is used to be. Getting rid of a 2nd mortgage payment can sometimes make the difference between keeping a home and losing it to a foreclosure. How then does a homeowner qualify? Quite simply, when a home is worth less than the balance of a first mortgage, federal bankruptcy law — at least in most states — permits a homeowner to treat a second mortgage like an unsecured credit card and discharge it in a Chapter 13 bankruptcy.
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Bankruptcy is a business decision, no less for a homeowner than it was for General Motors when it filed a Chapter 11 bankruptcy. [...] A bankruptcy is usually preceded by a loss of income, a divorce or medical issues, sometimes all three. Bankruptcy is not on anyone’s list of fun things to do, and clients only consider it when the alternative, like a foreclosure, is worse. Many have tried to do a short sale or loan modification to no avail and have found that the bank would rather foreclose. [...] These problems will persist until the powers that be decide to offer more than half-measures to address the foreclosure crisis.
For those facing the loss of their home and wondering whether a Chapter 13 bankruptcy may help get rid of a second mortgage, the following information may be helpful:
(1) It is disingenuous of banks to lull homeowners into a false sense of security by scheduling a foreclosure auction when a loan mod request is pending. If this happens to you, don’t be too trusting when your bank tells you not to worry about the foreclosure because they’ll continue the auction if there’s no answer by the auction date. What they are really saying is if you are denied, the foreclosure will happen. One client told me that Bank of America won’t even consider continuing a foreclosure auction due to a loan mod request until it was 72 hours before the auction date. I regularly receive panicked calls from homeowners denied a loan mod just before the auction occurs. While a Chapter 13 stops a foreclosure automatically, given how busy most bankruptcy lawyers are these days, finding one who has time to do a court filing at the last minute may be difficult.
(2) If you decide to see if you can get rid of a second mortgage, ask a broker to give you an opinion in writing of what your house is worth. Brokers will usually do this as a courtesy, figuring if you ever do decide to sell your house, you’ll go through them. Make sure you ask for the potential sales price rather than a list price, which may be somewhat inflated. If the estimate is less than the balance of your first mortgage, then removing it in a Chapter 13 bankruptcy is possible.
(3) Even if you can get rid of a second mortgage, however, a Chapter 13 is not for everyone. Removing a second mortgage only works if you have enough income to complete the plan successfully. If the real problem is that you don’t have enough monthly cash flow to pay your first mortgage and other expenses, Chapter 13 won’t solve that problem.
(4) Chapter 13 will permit strapped homeowners to discharge most or all of their credit card debt. It usually won’t discharge certain debt like taxes and student loans.
(5) Before making a decision, you want to be sure you can keep all property. Most states have exemptions sufficient to permit a homeowner to keep a house, vehicles, and other assets, however, some states are more generous than others.
The above is not, of course, legal advice. The best course of action would be to carefully takes stock of your situation, talk to a Real Estate professional (such as myself, ahem!), then if the numbers seem to work, talk to a lawyer. If you are really strapped for cash you can always call LegalZoom.com or buy a NOLO guide. I have found Legal Zoom to be quite responsive. The NOLO books are the cheapest of the cheap way to go (you might even be able to get them cheap at Half.com), but you have to do your own footwork; it can be done but it is daunting at times. The NOLO option is not recommended as a last minute choice.
If it was me, I’d use the Chapter 13 option to discharge a 2nd mortgage only if I was certain that my income could sustain the payments on the first, otherwise I’d just be delaying the inevitable, and paying for the privilege. Otherwise I would hold the bankruptcy option as the last ditch ace in the hole to clean up when either I’ve attempted a short sale (whether it succeeds or not) or gone through foreclosure. I’ve seen a number of cases where a lawyer has talked people facing foreclosure into filing for a bankruptcy that did not help them. A bankruptcy filing will stop a foreclosure action - for about 60 days, then you’re on the clock again and you’re on the hook again, this time for good as you’ve shot your ace in the hole.
