Massachusetts Bankruptcy Law: How to Handle a Second Mortgage

Massachusetts bankruptcy law provides individuals with a legal framework to manage their debts and find a fresh start. When homeowners in Massachusetts face financial distress, they often seek relief through bankruptcy, particularly when dealing with multiple liens, such as second mortgages. Understanding how to handle a second mortgage in the context of bankruptcy is crucial for navigating the complexities of the process.

In Massachusetts, there are two primary types of bankruptcy that individuals may consider: Chapter 7 and Chapter 13. Each of these options has distinct implications for second mortgages.

Chapter 7 Bankruptcy and Second Mortgages

Chapter 7 bankruptcy is often described as a liquidation bankruptcy. In this process, the debtor's non-exempt assets may be sold to pay off creditors. If you have a second mortgage, it is important to understand how Chapter 7 impacts your situation.

During Chapter 7 proceedings, you can potentially eliminate unsecured debts, but secured debts, like second mortgages, are treated differently. If you are behind on payments, the lender has the right to foreclose on the property. However, if the value of your home is less than the balance owed on the first mortgage, you may be able to “strip off” the second mortgage, effectively discharging your personal liability for that loan.

To successfully strip off a second mortgage in Chapter 7, the property must be underwater, meaning the first mortgage balance exceeds the current market value of the home.

Chapter 13 Bankruptcy and Second Mortgages

Chapter 13 bankruptcy is a reorganization bankruptcy that allows individuals to create a repayment plan to pay off all or a portion of their debts over three to five years. This approach might be more favorable if you wish to keep your home and are behind on your mortgage payments.

In a Chapter 13 plan, you can maintain your second mortgage while still catching up on missed lien payments. If your second mortgage is unsecured (i.e., your home is worth less than what you owe on the first mortgage), you may be able to discharge it entirely during the bankruptcy process.

It’s vital to include all mortgages when filing for Chapter 13, as the court must approve your repayment plan. If you can keep up with your Chapter 13 payments, you avoid foreclosure and may be able to eliminate the second mortgage completely after the plan is completed.

Impact on Credit and Future Financing

Whether you choose Chapter 7 or Chapter 13, filing for bankruptcy will have repercussions on your credit report. Typically, a Chapter 7 bankruptcy remains on your credit report for up to ten years, while Chapter 13 remains for seven years. This negative mark can impact your ability to secure future financing or loans.

Once you’ve completed a bankruptcy, it's possible to rebuild your credit. Engaging with a credit counseling service and making timely payments on any remaining debts can help restore your financial reputation over time.

Consulting a Bankruptcy Attorney

Handling a second mortgage and navigating the intricacies of bankruptcy law in Massachusetts can be challenging. It’s advisable to consult with a qualified bankruptcy attorney who can guide you through the process, review your specific financial situation, and help determine the best course of action for your circumstances.

In conclusion, understanding Massachusetts bankruptcy law is vital when dealing with a second mortgage. Whether you opt for Chapter 7 or Chapter 13, being informed can empower you to make decisions that lead to debt relief and financial recovery.