Homeowners in Maryland who are struggling to pay their monthly expenses may want to consider bankruptcy to find relief from the stress of overwhelming debt. The U.S. Courts explains that Chapter 13 bankruptcy allows people who have a reliable income that does not cover their debts each month to create a repayment plan that they can live with.
In many cases, bankruptcy filers are able to keep their homes. But what if there is a second mortgage?
First mortgage vs. second mortgage
According to the Bankruptcy Bar Association for the District of Maryland, Baltimore Chapter, in Chapter 13 bankruptcy, the bankruptcy trustee includes the first mortgage and any past-due payments in the reorganization so that the borrower is able to catch up and keep current on the loan. As long as he or she makes the monthly bankruptcy payments, the lender will not repossess the house.
When figuring the amount that the debtor can pay each month, the trustee may not include unsecured loans. After the debtor completes the three- to five-year repayment plan, the bankruptcy court discharges the unsecured debts that the borrower did not pay. If the second mortgage was not repaid in full, it may be stripped from the real estate at discharge.
Maryland has two categories of lien stripping: the strip-down and the strip-off. The strip-down removes only the portion of the lien that is greater than the value of the property, but the strip-off removes the lien entirely. Second mortgages on homes qualify for the strip-off in Chapter 13 bankruptcy, so the home equity loan will not result in repossession: it will be discharged.