Can You Refuse to Reaffirm a Second Mortgage During Bankruptcy?

By Mary Jane Freeman

Although you've filed for bankruptcy, it is still possible to keep your home despite having a second mortgage on the property. You can enter into a reaffirmation agreement with the lender. By doing so, you agree to remain liable for debts secured by the property. However, you have to stay current and continue making payments. If you don't, you won't be able to discharge this obligation in the future, and the lender can come after you for the balance of the debt. If you have the chance to reaffirm a second mortgage and refuse, you may lose your home.

Although you've filed for bankruptcy, it is still possible to keep your home despite having a second mortgage on the property. You can enter into a reaffirmation agreement with the lender. By doing so, you agree to remain liable for debts secured by the property. However, you have to stay current and continue making payments. If you don't, you won't be able to discharge this obligation in the future, and the lender can come after you for the balance of the debt. If you have the chance to reaffirm a second mortgage and refuse, you may lose your home.

Secured vs. Unsecured Debts

Secured debts are those that a creditor has secured a right in a debtor's property through a lien, as in the case of a car or home loan. The property being secured is often referred to as collateral. The creditor's security interest in the property ensures payment of the debt, so if the debtor fails to make payments as agreed, the creditor can take the property. For example, failure to make payments on a mortgage or car loan results in the foreclosure of the home or repossession of the vehicle. In contrast, unsecured debts, such as credit cards and personal loans, are not secured by any personal property.

Get a free, confidential bankruptcy evaluation. Learn More

Second Mortgage

A second mortgage, or junior lien, is a loan you take out on your property while the original loan, or primary mortgage, is still in place. Common examples include home equity lines of credit and home equity loans. As with the first loan, the home serves as collateral, making the second mortgage a secured debt. In the context of bankruptcy, your second mortgage holds a secondary, or subordinate, position to your first mortgage. This means that if your home is sold to pay off your mortgage or other debts, the original mortgage lender receives payment first. In the event there are not enough funds to pay both mortgages, some or all of the second mortgage may go unpaid. In other words, it will be treated as an unsecured debt.

Chapter 7 vs. Chapter 13

If you fall behind on your second mortgage payments, you might file either Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy requires you to give up all of your nonexempt assets to pay your creditors. On the other hand, Chapter 13 lets you hold on to your assets; you enter into a repayment plan and pay some or all of your debts over a three- to five-year period. Chapter 13 requires all secured debts to be paid by the plan, which means these debts take priority. If you are behind on your second mortgage, you would be required to bring this loan current before you receive a discharge at the end of the repayment plan. However, if your second loan exceeds the value of your home, it can be "stripped" by the court, meaning it will be turned into an unsecured debt, and you may not be required to pay it in full, or at all.

Reaffirmation

If you want to keep your home despite filing for bankruptcy, you have two options available to you. With Chapters 7 and 13, you can either give up your home or reaffirm the second mortgage. Reaffirmation of a loan, a legally binding agreement, allows you to waive the right to discharge the mortgage in bankruptcy by promising to pay the debt. Not all creditors accept reaffirmation, especially if you are badly in arrears. With a reaffirmation agreement in place, however, you continue to make mortgage payments during the bankruptcy and after. If you subsequently fall behind, you will not be able to discharge this debt, and the lender can take legal action against you.

Get a free, confidential bankruptcy evaluation. Learn More
How Does Reaffirmation in Bankruptcy Work?

References

Related articles

What Happens If You Include Your Home in Chapter 7?

When a homeowner files for Chapter 7 bankruptcy, what happens to the home depends on various factors, including how much equity the homeowner has. A Chapter 7 bankruptcy wipes out all the debts that federal law allows you to include on the discharge, freeing you of legal responsibility for those obligations. You'll also get an automatic stay against your creditors when you file, which temporarily prevents the creditors from starting or proceeding with any collection actions. The automatic stay lasts until the case is discharged or dismissed.

What Happens When You Reaffirm a Vehicle After Bankruptcy?

Bankruptcy allows you to get a fresh start financially, clearing up debts by paying some and dismissing others. Filing Chapter 7 bankruptcy, also called "liquidation" bankruptcy, doesn’t mean you have to give up everything you own, even if you still owe money on some of your assets. If you reaffirm your obligation to pay for an asset, such as a vehicle, you can keep that asset. However, without reaffirmation, you could lose your vehicle after your bankruptcy proceedings if you still owe money on a car loan.

How to Remove a Lien After Chapter 13 Discharge in Florida

Floridians who wish to hold on to valuable assets, such as the family home, often choose to file for Chapter 13 bankruptcy when they find themselves drowning in debt. They get to keep their property while paying some or all of their debt over an extended period of time. If a property has multiple liens on it, Chapter 13 can even strip these liens from the property. As long as a debtor successfully completes his payment plan, creditors typically release the liens automatically when the bankruptcy is discharged.

Related articles

What Happens if a Bank Discharges a Home Loan During a Bankruptcy?

At the end of a bankruptcy case, you will receive a bankruptcy discharge that relieves you of all financial obligations ...

What Happens if I Don't Reaffirm My Mortgage After Bankruptcy?

Filing for Chapter 7 bankruptcy is a means to discharge your debts and get a financial "fresh start." A home ...

How to Reduce Your Mortgage in a Chapter 13

When people file for Chapter 13 bankruptcy, their debts typically exceed their monthly income and they can no longer ...

What Happens When a Bank Charges Off Your HELOC After a Chapter 7 Discharge?

If you file for a chapter 7 bankruptcy, you are asking a federal court to protect you from collection actions and ...

Browse by category