Settling a Second Mortgage After a Chapter 7 Bankruptcy

Imagine that you have recently filed a Chapter 7 bankruptcy, but you still have two mortgages. You are current on both of your mortgages, but what happens if you stop making payments on your second mortgage and stay current on your first mortgage?

Many people are dealing with this very scenario, especially during the global COVID-19 pandemic, while the economy is struggling and many people are struggling to pay their rent, mortgage and other bills and debts. During this guide, we will delve into filing a Chapter 7 bankruptcy and settling a second mortgage after filing Chapter 7.

Filing for Chapter 7 bankruptcy in Florida

Bankruptcy is fairly common. In the year 2018 alone, there were over 750,000 bankruptcies filed across the United States. And it’s not surprising. The average American currently has about $38,000 in debt, according to recent studies. And according to a study by the American Journal of Medicine, about 62 percent of all bankruptcy cases are caused by medical expenses and 92 percent of people filing bankruptcy due to medical debt have over $5,000 in medical debt alone.

Bankruptcy is usually filed in federal court in the district where the person in debt lives, based on the most recent six months before filing the bankruptcy base. If you have lived multiple places in the past six months, the filing takes place where you spent the most time. Businesses should file where their company is located, while corporations should file in the district where the business is incorporated. The main place of business usually depends on the circumstances and facts of the case. Many companies conduct their business in multiple states and have locations across the United States, so the place that they file bankruptcy should be where their primary business decisions were made in the six months before the bankruptcy was filed.

When you are filing for bankruptcy, you will be required to attend a meeting of the creditors in court, also known as a 341 meeting, because the meeting is necessary, according to section 341 of the bankruptcy code. If you fail to attend this meeting, your bankruptcy case will likely be dismissed. You are allowed to have your bankruptcy attorney with you at the meeting. In fact, we would strongly recommend bringing a bankruptcy attorney with you to this meeting.

Settling second mortgage after Chapter 7

One common strategy for settling a second mortgage after Chapter 7 is approaching the second mortgage with a settlement offer in order for your lender to remove the lien on your second mortgage. However, it is crucial to understand the risks of this strategy. You don’t need to settle the second mortgage, and settling is voluntary. Also, if you stop making payments, the second mortgage still has the legal right to foreclose.

It is usually in the best interests of the second mortgage lender if your home is worth less than what is owed on the first mortgage and you received a discharge from your Chapter 7 bankruptcy. If you stopped paying the second mortgage, the second mortgage lender cannot make you pay, and all the lender is left with is a foreclosure right that is virtually worthless. The second mortgage lender has the legal right to foreclose on your home, but it is usually not cost-effective for the second mortgage lender to foreclose, since they would incur all of the legal costs during foreclosure and would need to pay off your first mortgage.

In order to motivate settlement on your second mortgage, you would need to entirely stop paying your monthly mortgage payments, which leads to the risks mentioned above. However, second mortgage settlements have certainly been taking place. The average second mortgage settlement amounts are typically between 5 and 15 percent of the balance owed on the second mortgage, paid in a lump sum. We recommend hiring or speaking to an attorney to help you facilitate your second mortgage settlement. The only options for erasing a lien on a second mortgage include paying the mortgage in full or settling it, if the bank will agree to that arrangement.

How to settle a second mortgage

Considering settling a second mortgage after Chapter 7 and wondering how to actually settle the second mortgage? We recommend taking the following steps:

• Contact your second mortgage lender to discuss the debt. Start the settlement process by expressing an interest to your second mortgage lender in paying off the debt. Explain the situation to your lender if your property is in foreclosure, and offer to give them your most recent tax assessment to show your lender that your loans exceed the value of your home.
• Make an offer to your second mortgage lender. Next, you need to make an offer to your second mortgage lender. Expect your second mortgage lender to counteroffer, especially if you begin the offer low. Second mortgages are usually settled for between 5 and 20 percent of the second mortgage loan balance. If your second mortgage lender approaches you with an offer before you can make an offer, then respond with your own offer. And keep in mind that you should not feel any pressure to agree to a settlement number that you are uncomfortable with paying.
• Remind your second mortgage lender that you know your rights. Next, it is super important to remind your lender that you know your own legal rights, especially if your second mortgage lender is not willing to either settle the second mortgage or reduce the debt on your second mortgage loan.
• Put your agreement in writing. When you and your second mortgage lender do come to a settlement agreement, make sure to put the agreement in writing. As soon as you agree on a settlement number, ask your second mortgage lender to send a written agreement for your own records before you actually pay the lump sum payment.

If you are considering settling a second mortgage after Chapter 7 in Florida, the Van Horn Law Group can help. Contact us or visit our website to learn more here.