Dear Bankruptcy Adviser,I own a second mortgage on a property. The amount on the second mortgage is $40,000. It appears that the property may be headed for foreclosure, or that the owner could be about to declare bankruptcy. Is there anything I can do to avoid losing my investment? I am desperate.-- Jacob
Dear Jacob,You could be in a difficult situation, one in which you could lose your investment. The outcome largely depends on the intentions of the borrower. If the borrower plans to walk away from the house and file bankruptcy, you might have no recourse against the homeowner.
I need to tell you that each state is different. So you ought to discuss your case with an attorney in your area. However, I can give some general options.
It appears, based on your question, that your second mortgage loan is unsecured. That means the property's value is less than what the borrower owes on it. For example, let's suppose the house is worth $200,000, and the first mortgage is for $250,000, followed by your loan for $40,000. If the first mortgage lender forecloses, you would not receive anything from the sale.
There are only a few ways for you to avoid losing your investment. One, there is the possibility that the homeowner will continue to make monthly payments to you, as originally agreed. Maybe the homeowner is going through a temporary period of financial difficulty. But if the homeowner is having a difficult time paying the first mortgage, he or she definitely cannot pay your loan.
Alternatively, you might offer the homeowner a lower monthly payment on your mortgage. Lowering your monthly payment could mean that the homeowner could afford to pay the first mortgage, which might ward off foreclosure or bankruptcy.
Finally, you could try to work out a debt settlement agreement. This could prove difficult because the homeowner would have to come up with a large sum of money at once. If he or she is already on the brink of bankruptcy, settling on a second, unsecured mortgage would likely be a very low priority. The homeowner would also face tax consequences of settling the debt. The difference of the balance owed and the settlement amount is a taxable event under Internal Revenue Service rules. Translation: After paying you a lump sum debt settlement, the borrower might have to come up with another lump sum for Uncle Sam.
You might not have any other recourse beyond these three options. It is hoped that the homeowner wants to keep the house, can work out an agreement with the first mortgage lender and continue paying you.
However, if the homeowner does file bankruptcy and walks away from the house, you might not have any options to protect your investment. Barring any illegal conduct by the homeowner, the liability on the loan will be eliminated in the bankruptcy. The homeowner will be free to walk away from the house and, unfortunately for you, your loan.