Some homeowners are taking advantage of a little-known loophole in the bankruptcy law to get rid of their second mortgage and also avoid the pain of foreclosure, reports the San Jose Mercury News. Here’s how it works:
The debt from a first mortgage can’t be eliminated through bankruptcy proceedings if you plan to stay in your home. But you can declare the debt of a second mortgage as unsecured debt when there isn’t any equity to support them, like with all the tons of underwater houses out there…see where this is going?
In this case the payments for the second mortgage get put on pause while the homeowner goes through a debt repayment plan. And after completing that process, the second mortgage gets totally vaporized. Whoosh!
Bankers hate it, but for a homeowner who bought an investment property during the boom, it might be the only way for them to get out from under crushing debt.
Bankrupt homeowners shed second mortgages [San Jose Mercury News] (Thanks to Alex!)