| Most homeowners facing foreclosure would rather | | | | market value at the present time ($250,000), the |
| avoid both losing the home and having to file | | | | second mortgage company and HELOC provider |
| bankruptcy. They are concerned about the social | | | | would receive nothing from the proceeds - therefore, |
| stigma of filing, the damage to their credit record for | | | | they are, for all practical purposes, unsecured by the |
| the next seven years, and the difficulty of borrowing | | | | property right now. |
| money for a home or auto loan in the future. However, | | | | But what does this really mean for homeowners? |
| there are a number of benefits, under the right | | | | Who cares if a debt is classified as secured or |
| circumstances, to filing for protection under the federal | | | | unsecured? After all, the bankruptcy filers have to pay |
| bankruptcy laws to reduce mortgage debt. | | | | back the money they borrowed and pledged their |
| One of the greatest of these benefits is that, with a | | | | home as collateral, right? |
| Chapter 13 (reorganization) bankruptcy, the courts are | | | | Wrong. When bankruptcy judges take a secured lien |
| able to take secured junior mortgage loans and have | | | | on a home and reclassify it as unsecured debt, the |
| them unsecured. Any second or third mortgage or | | | | balance can be reduced on it. Homeowners would not |
| Home Equity Line of Credit (HELOC) can be | | | | have to pay back nearly as much as they owed on |
| reclassified as an unsecured debt for the purposes of | | | | the debt and the mortgage would be treated just like |
| bankruptcy. Of course, this can not be done in every | | | | any other unsecured loan like a credit card or personal |
| instance, and there are requirements that must be met | | | | loan. This can represent a significant savings to the |
| by the loan and the value of the property. | | | | homeowners and a large loss to lenders that made |
| To take a mortgage off of a property, the loan must | | | | ill-advised loans on properties whose values have now |
| no longer be secured by the home's value. For | | | | fallen. |
| example, take the following case of a property that | | | | Even better, the amount that homeowners are |
| has declined in value after several loans were taken | | | | required to pay back to a lender is determined by their |
| out on it: | | | | income - not the original amount of the debt. In a |
| Home Value: $250,000 | | | | Chapter 13 bankruptcy case, petitioners are put on |
| First Mortgage: $265,000 | | | | either a three or five year payment plan, and their |
| Second Mortgage: $40,000 | | | | disposable income is used to calculate how much |
| HELOC: $15,000 | | | | money the lenders will paid back on their loans. For |
| The second mortgage and HELOC in the above | | | | families whose income has dramatically fallen due to |
| example are no longer secured by the value of the | | | | job loss, this may be a way of bringing their debt load |
| property; in fact, even the first mortgage is only | | | | back in line with their ability to pay. |
| partially secured. This is not a rare example, either, as | | | | Chapter 13 bankruptcy, just like any other solution to |
| many homeowners have taken out more than one | | | | foreclosure, is not right for everyone. But for |
| loan on a house, lenders relied on inflated appraisals, | | | | homeowners who qualify, can afford the payment |
| and now property values have crashed back down to | | | | plan, and have consulted with a good personal |
| reality. | | | | bankruptcy lawyer, the ability to reduce their debt |
| If the owners of the property declared bankruptcy, | | | | burden on second mortgages or equity lines of credit |
| these two junior liens could be reclassified as | | | | represents a large benefit for filing. |
| unsecured. Even if the house could be sold for its fair | | | | |