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Can I shed my second mortgage with Chapter 13?

In these uncertain financial times, many New Jersey residents may find themselves encumbered by second mortgages that leave them heavily in debt with home values that are upside down. That can be very discouraging and cause debtors to lose hope that they will ever get out from under the yoke of debt.

It's important for homeowners to understand that they do have options available to them for debt relief. One potential option is to file for Chapter 13 bankruptcy.

Second mortgages under Chapter 13

There is an unfortunate misconception that second (and subsequent) mortgages are automatically dismissed in a Chapter 13 bankruptcy. They are not — but they can be.

To understand how this works, you must first understand some basics of a Chapter 13 bankruptcy filing. Rather than wiping the slate clean in a Chapter 7 bankruptcy filing, Chapter 13 allows petitioners to reaffirm their debts. While they will get additional time to catch up on these debts — three or five years — they are still responsible for living up to the terms of the repayment plan approved by the bankruptcy court.

When there is a second mortgage on a piece of property, in many cases the property has zero equity. This essentially makes second and subsequent mortgages akin to unsecured debts, which are lower priority and can be discharged in the Chapter 13 bankruptcy.

This isn't a given

Some homeowners who are counting on this will be chagrined to learn that this is not always the case. If the property value ever increases to even a single dollar more than what is owed on the first mortgage, it cannot be eliminated.

In fact, the second mortgage lender may have been quietly waiting in the wings, making discreet inquiries into the real estate market in your area and staying apprised of fluctuations that could tip the scales in their favor.

That's why, for best results, it is always better to deal with your outstanding debts sooner rather than later.

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