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Second mortgage and the Chapters 7 and 13 differences

Many New Jersey homeowners have felt the pinch of the weak economy over the past decade. At times, they may have felt it was a one-step-forward-two-steps-back exercise in frustration.

In some situations, bankruptcy may be the smarter choice over debt settlement or other options. It can be confusing to decide whether a Chapter 7 or a Chapter 13 bankruptcy would be best.

Second mortgage not discharged in Chapter 7

One factor to consider is whether the homeowner has a second mortgage on the home. If the owner does, then it may be wise to review of Chapter 13 possibilities. A second mortgage, generally secured by the home itself, may not be dischargeable under the rules of Chapter 7, as that kind of bankruptcy generally only discharges unsecured debts.

However, if there is no equity in the home because the first mortgage is substantially greater than the value of the home, a second mortgage may be dischargeable by a Chapter 13 filing. This can make Chapter 13 a more valuable option than Chapter 7 filing.

Second mortgage discharge versus Chapter 13 payments

In Chapter 13, the debtor pays a monthly amount to the bankruptcy court for three to five years, at which time the debts discharge. This payment is not necessary in a Chapter 7 bankruptcy. However, in Chapter 7, the second mortgage would remain.

For example, compare a $300 monthly second mortgage payment for the full term, such as 25 years, under a Chapter 7, to the three years of bankruptcy court payments, which may also be about $300 depending on the debtor's income and financial situation. This difference illustrates that the Chapter 13 bankruptcy, despite taking longer and requiring a payment plan, may be more advantageous than a Chapter 7.

In the end, debtors should ideally evaluate all bankruptcy options considering where they will be in the more distant future, such as three to five years, rather than automatically going for a Chapter 7 bankruptcy. While the Chapter 7 can significantly reduce the financial pain quickly, a Chapter 13 filing may provide more gain and relief over time. Going the extra yard for a detailed analysis of their specific situation is a step that most debtors will not regret and may be deeply grateful for in three years.

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