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What happens to a second mortgage in Chapter 13 bankruptcy?

A homeowner in Ohio might find it difficult to sell a house that is burdened with a second mortgage. To transfer the title of a property to a buyer, it has to be free of any encumbrances. The holder of the second mortgage has a lien on the house that serves as security for the loan. Although personal bankruptcy may be a solution, property owners may want to explore other options before filing for bankruptcy.

In rare circumstances, it may be possible to negotiate a lower payoff amount with the holder of the second mortgage. An arrangement by which a portion of the money is paid at closing of the sale and the balance over an agreed upon period may be allowed. Negotiations may also result in the first mortgage holder agreeing to grant the second mortgage holder a portion of the proceeds rather than getting nothing in the event the sale is not completed.

In some cases, a home is underwater, meaning that its value does not cover both the first and the second mortgages. A note receivable may be negotiated with the second mortgage holder in lieu of payment. It may be an unsecured note for full payment upon the sale of the property, or a secured note with a lien on another property of the homeowner.

Some Ohio homeowners whose homes are valued lower than the amount outstanding on their first mortgages opt to file for Chapter 13 bankruptcy. The court may allow the second mortgage to be stripped, thereby changing it into an unsecured debt. An experienced bankruptcy attorney can guide a homeowner through the legalities of the proceedings. A Chapter 13 bankruptcy allows a debtor to pay creditors, including the stripped second mortgage, over a period of three to five years according to a court-approved payment plan. Any balance due once the plan is successfully completed may be discharged by the court.

Source: homeguides.sfgate.com, "What If I Sell My House But Can't Pay Off a Second Mortgage?", Katie Jensen, Accessed on Jan. 8, 2016

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