All your debts must be listed in a bankruptcy filing, making it impossible to file bankruptcy on a second mortgage while not including the first mortgage. It's understandable that people in deep financial trouble might want to rid themselves of certain debt through bankruptcy while excluding valuable properties such as real estate or cars. However, there is simply no provision in the federal bankruptcy laws for doing so.
Chapter 13 Bankruptcy
The two most used forms of personal bankruptcy are Chapter 7 and Chapter 13, according to the Federal Trade Commission. Chapter 13 offers the most protection for people trying to protect real estate. Chapter 13 requires a payment plan of three to five years, according to the Nolo legal website. The bankruptcy allows you to keep your home as long as you continue paying the mortgage. Filing for Chapter 13 bankruptcy would allow you to keep your home and first mortgage while also continuing to pay the second mortgage. Other debts, such as unsecured credit card debt, would be eliminated at the end of the payment period.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is best suited for eliminating unsecured debt such as credit cards, according to Nolo.com In some instances, real estate and other assets can be seized by the bankruptcy court in Chapter 7 and sold to satisfy creditors. However, MSN Money reports that all states offer so-called "homestead exemptions" that in most cases allows people filing Chapter 7 to keep their primary residence if the equity in the home is below a certain level. Having a second mortgage actually helps under this scenario because it reduces the equity available in the home, making it easier to qualify for the homestead exemption. Homestead exemptions vary widely depending on the state, according to MSN Money. A first mortgage is the original mortgage used to purchase the home. A second mortgage is an additional mortgage, such as a a home equity loan. Equity in the home is used as collateral for the second mortgage.
Bankruptcy Advice
Trained credit counselors approved by the U.S. Trustee Program -- a part of the U.S. Department of Justice -- can offer the most unbiased advice on filing for bankruptcy. Initial consultations with the counselors is usually free, and if you decide to move forward with bankruptcy, you must complete a formal pre-bankruptcy counseling session. A certificate of completion, which is awarded by the counseling agency, must be included with your paperwork for the bankruptcy.
Debt Alternatives
There are other solutions for debt management that are not as emotionally traumatic or damaging to your credit as bankruptcy. Credit counseling agencies offer debt management plans, which allow counselors to completely manage your unsecured credit over about a four-year period. The counselors will negotiate with lenders for lower interest rates, smaller monthly payments and even the elimination of some fees and finance charges. Counselors can also help with real estate by contacting mortgage companies to discuss loan modifications on all of your real estate debt. For example, a counselor might be able to significantly lower the monthly payments on your first and second mortgage by negotiating lower interest rates, a longer term to pay or both. Debt management moves such as those could be enough to help you avoid bankruptcy.
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