Dear Bankruptcy Adviser,
Due to several changes in my financial circumstances, I had to file a Chapter 7 bankruptcy almost two years ago. As a result, I had my unsecured debt discharged. I have kept my house, thus maintaining my first and second mortgages. My question is this: Can I still file Chapter 13 bankruptcy and try to wipe out my second mortgage? My wife and I are still struggling. My first mortgage exceeds the appraised value of my house. My second mortgage (a home equity loan) is around $90,000 and puts me that much deeper underwater.
I try not to answer questions unless I can give a pretty definitive answer. With your question, however, the only answer available is "it depends."
Here is the longer answer:
You state that the value of your home is less than what you owe on the first mortgage. For example, you owe $200,000 on the first, but the property is worth only $185,000. This means that you have no equity in the house. In fact, the value is so low that the second mortgage is completely unsecured. The only difference between the second mortgage and a credit card or personal loan is that a lien exists against the property.
Unfortunately, that lien makes all the difference in your ability to get rid of the second mortgage. The only type of bankruptcy currently available to eliminate a second mortgage is a Chapter 13 bankruptcy.
In a Chapter 13 bankruptcy, known as a reorganization bankruptcy, you could have the second mortgage eliminated -- wiped out -- after you complete your case. The catch: A Chapter 13 bankruptcy lasts at least three years and as long as five years, depending on your income.
During that reorganization period, you will make payments to your first mortgage lender as well as to the court (more specifically, the trustee assigned to your case) for payment to your other creditors. These other lenders might get paid something over the bankruptcy period; however, any remaining balance will be eliminated once you complete the Chapter 13 reorganization.
The reason I cannot say this is an option for you is because you already filed the Chapter 7 bankruptcy. At the end of the Chapter 7 bankruptcy, you received a Discharge of Debts, which means all of your unsecured debts were eliminated.
You filed the Chapter 7 bankruptcy two years ago. That means that if you filed a Chapter 13 bankruptcy now, you would not be eligible to receive a discharge of debts. You must wait four years from the date of filing the Chapter 7 to get a discharge in the Chapter 13. For example, if you filed the Chapter 7 on Jan. 1, 2007, you would need to wait until Jan. 2, 2011 to file a Chapter 13 bankruptcy and receive a discharge.
This is important because some judges believe that you can only eliminate a second mortgage if you can discharge that debt in the bankruptcy. After the completion of the typical Chapter 13, any remaining balances are discharged.
This is the tricky part. Each state has either one or more bankruptcy districts. Each district has judges assigned to hear bankruptcy cases filed in that particular district only. For example, California has four bankruptcy districts. As of now, California bankruptcy judges have different opinions as to whether you can eliminate a second mortgage in a Chapter 13 after filing a Chapter 7 bankruptcy. You need to find out whether the courts in your particular district have made a final decision regarding this type of case.
In order for there to be a uniform interpretation of this issue, the U.S. Supreme Court would have to hear a case and make a final ruling. Before filing the new bankruptcy and placing another bankruptcy notation on your credit report, contact at least three bankruptcy attorneys in your area and get a definitive answer.