Before filing bankruptcy, if you are having trouble with a second mortgage, try getting a second mortgage modification.
What Is a Second Mortgage?
A second mortgage is exactly what it sounds like-- another mortgage on your home. It's called a "second" mortgage because it is secondary in priority to the first mortgage. For example, if a home is foreclosed on, the first mortgage is paid off in its entirety by the proceeds of the foreclosure sale before anything is paid towards the second mortgage. This means that second mortgages have less protection than first mortgages.
Second mortgages are often used to take equity out of a home, rather than buy a home. As such, they are often called home equity loans or home equity lines of credit.
What is Loan Modification?
Loan modification is when a lender agrees to modify a loan in some way, such as by reducing the interest rate, extending the time to pay, or even accepting some reduction in the amount owed. Lenders may do this when debtors are in genuine financial distress--and also can't sell the home if necessary, owing to adverse market conditions--since if the lender doesn't make it easier on the debtor, the debtor may end up defaulting on the loan or declaring bankruptcy.
Pros and Cons of Modification
The pro is that modifying a loan can often let a homeowner avoid foreclosure, default, and/or bankruptcy. It can enable a homeowner to stay in their home, paying an amount they can afford, while waiting for the market or their personal financial situation to improve.
The only real con is that it's purely voluntary on the part of the lender: they don't have to do this. Since lenders are understandably reluctant to give up what they're entitled to, it often takes a great deal of persistence and a very compelling showing of financial distress and poor market conditions to get a lender to consider modification.
Second Mortgages are More Likely to Be Modified Than First
Remember: second mortgages have less protection, because of their lower priority, than first mortgages. This means that second mortgage lenders have more incentive to help the debtor than first mortgage lenders, since first mortgage lenders are more likely to recover at least part or most of the outstanding balance of their loan.
How an Attorney Can Help
A lawyer can help negotiate with lenders, and can also let the homeowner know when bankruptcy may be the best option--and if it is, the laywer can help the homeowner file.
