Anyone who has faced past financial challenges understands the complexities and inconveniences you have to deal with. When you amass wealth from various sources, you can use your home as collateral to secure second or third mortgages. While the deals are convenient and helpful in receiving money relatively fast, you also need to plan adequately on the options you will rely on in case of any eventualities. Among the possible options, you can depend on filing for bankruptcy to reduce the financial load. Depending on the type of bankruptcy you choose to file for, a bankruptcy court may relieve you of the financial obligations to pay off a second or third mortgage. However, it is vital to present comprehensive data and documents when applying for bankruptcy, as the courts issue stringent conditions that you should follow.
Therefore, working with a bankruptcy lawyer will make your work easier, as he/she is well equipped to provide professional advice and support. Moreover, your bankruptcy attorney will know how to handle specific circumstances efficiently, compared to when you act alone. Since removing your second and third mortgagors from your list of entitled parties requires diligence and proper research, you also want to work with experienced lawyers who understand the bankruptcy system requirements and modes of operation. We at the Los Angeles Bankruptcy Attorney focus on providing excellent bankruptcy services to persons in Los Angeles, California, for a smooth transition after declaring bankruptcy.
Understanding How Second and Third Mortgages Arise
When you take out a mortgage, it operates as a secured loan, meaning that you will have provided collateral to act as security in case of defaulted loan repayments. A mortgage loan, therefore, places your home as the collateral that secures the transaction. Since different homes have varying values, people can take out additional mortgage loans tied to one house.
In the circumstance, you disclose your home as security for the first mortgage and any subsequent mortgages. The next mortgage loans are also known as junior loans, as they often involve less money than the first mortgage. Nevertheless, obtaining a second or third mortgage means that the mortgagors have a secured debt with you and can exercise a lien over your house in case of defaulted payments.
You may obtain junior liens for various reasons, depending on the financial circumstances in your life. However, it is best to assess the economic basis for adding to your debt to avoid incurring irrelevant obligations that you would have otherwise avoided. Some of the main reasons for taking out the second and third mortgages include:
To Buy Investment Property
For most, buying an investment property in real estate is a financial goal, based on the returns it makes. Consequently, you could choose to take out a loan secured by your home to purchase the property, hoping to make significant returns.
While the business model is lucrative, it helps to remain aware of the real estate’s risky nature, in that the rates are prone to decline. Therefore, if your investment purchase does not provide the expected returns, you will have to find a way to deal with your creditors and retain your home.
To Pay Medical Bills
When you or your loved one is dealing with a severe ailment or accident injuries, your medical expenses may exceed the insurance coverage limit, meaning that you will need alternative sources of money. Additionally, most hospitals include a strict payment deadline, meaning that you may have to quickly access the cash. Thus, taking out a junior lien on your home may be a viable option for you, as the mortgagor is likely to accept lien over your home better than any other type of security.
To Pay Off High Credit Card Debts With Incurred Interest
A credit card system allows you to use monetary funds on credit provided you make repayments by the set time. The system helps accumulate a good credit score that becomes important when you want to make significant purchases like a home or in certain business investments. Therefore, most credit card users would prefer taking out second or third mortgages to clear their credit debts for a maintained credit score.
To Secure Your Children’s College Fees
Additionally, sending your children to college is an expensive process, primarily because you have to pay for the school and housing fees, often at once. Without a secured savings account, you may find it convenient to obtain the funds by taking out a second and third mortgage.
While you are at liberty of taking out second or third mortgages for different transactions, it is advisable to avoid using the loan money on liabilities like vacations. The rationale behind this is that you may end up spending all the money on holiday with no returns to support yourself in case of future financial difficulties.
Further, buying a new car using your second or third mortgage is not advisable, as the vehicle becomes a liability. For example, if the car is involved in an accident, you may have to spend even more money on repairs and replacements. Eventually, your debt accumulation will be high and may lead to difficulties in repaying the creditors.
Ways of Receiving Second or Third Mortgages
When you apply for second or third mortgages, your creditor may issue you the funds in different payout systems. You can choose the method that works best for you, depending on whether you need the full amount urgently.
Home Equity Loans
If your financial situation places you in a position where you urgently need a lump sum of money, you will choose a home equity loan. The payout loan system assesses your house’s equity to determine whether you are fit for a second or third mortgage. Your home equity is the value of your home when all secured debts are deducted.
Hence, if you have high equity, the creditor will feel confident in lending you the second or third mortgage, as you will have enough money to pay back your loans in case of filing for bankruptcy. Usually, the home equity loans provide a fixed interest rate, meaning that the amount will accumulate predictably. The repayment period allocated to most equity loans is fifteen to thirty years.
Clearing your loan in the shortest time possible is always advisable, as you will avoid the accumulating annual interest. However, a high-interest accumulation may also help your case, especially when you face financial challenges. If the second or third mortgage accumulates to an amount higher than the first mortgage, you can avoid making full repayments by filing for bankruptcy,
Home Equity Lines of Credit
A home equity line of credit (HELOC) is the alternative option for debtors seeking second or third mortgage loans. The payout system works similar to a credit card system, as your creditor will allow you to receive small amounts of money periodically from an agreed total loan sum. You will also have to make repayments on time to avoid foreclosure on your house, as it acts as the loan collateral.
Under the home equity line of credit, you will make repayments under a flexible interest rate so that you can negotiate for lower rates from your creditor. However, that also means that you may be subject to fluctuating rates that make repayments inconsistent based on the unpredictable rates.
Removing Second and Third Mortgages
When you cannot continue making consistent repayments for all your mortgages, the creditors may threaten to begin foreclosure of your home based on its value. Since you will have limited options, the best alternative is to contact a bankruptcy attorney who will issue advice on the best viable alternative to secure your home from the creditors.
Usually, a second and third creditor will be unable to foreclose your home if you file for Chapter 13 bankruptcy, depending on the home’s equity value. Hence, your bankruptcy attorney will advise you to begin preparations to file for the form of bankruptcy as security from the rights of lien given to second and third mortgages.
Eligibility Criteria for Filing Chapter 13 Bankruptcy
Before you proceed to petition a bankruptcy court to declare you bankrupt under chapter 13, your bankruptcy attorney will go over the requirements to ensure you meet the set eligibility criteria. Performing the due diligence will save you the costs and time you may otherwise spend when filing a court application, only for the judge to deny it.
Some requirements that you must meet include:
You Should Have a Reliable Source of Income
The most crucial factor for the judge to consider is whether you have a steady income source to support a chapter 13 repayment system. Ideally, this type of bankruptcy is only available to workers with stable wages to meet the repayment plan period.
Hence, if you have recently lost your job, you may seek alternatives like filing for bankruptcy through your spouse. However, the alternative’s effectiveness will depend on whether your spouse’s name is listed in the second and third mortgages. In some cases, technicalities may limit the amount of involvement a third party has in your loans.
You Should be Within the Monetary Limits of Secured and Unsecured Debt
Additionally, the judge will check whether you are well within the set limits for secured and unsecured debt, respectively. Usually, the limitations exist to prevent debtors with serious debt amounts from escaping their financial responsibilities by filing for bankruptcy. Hence, you will need to check the set limits and stay within the bracket.
Unsecured debt is any loan that does not include collateral in case of non-repayment. While these debts are recognized as financial obligations for the debtor to repay, they are of less priority than secured debts. As a result, the set debt limit is $394,725.
On the other hand, secured debts include collateral as the safety net, meaning that you can accumulate higher amounts. The limit, therefore, sits at $1,184,200.
If you have surpassed the limits for any of your debts, your bankruptcy lawyer will advise you to pay off some amounts, even if you only manage to pay out just enough to meet the chapter 13 criteria.
Present Recent Documents on Filed Tax and Returns
The bankruptcy court is unwilling to help a debtor who defaults in filing tax returns, as it is an illegal practice. Therefore, you want to ensure that you have all your tax return documents and receipts when preparing to file for chapter 13 bankruptcy.
With the relevant documents available for presentation in bankruptcy court, the judge can verify your tax compliance and therefore authorize the petition to proceed. Eventually, he/she will declare you bankrupt, meaning that you may move to use the protection it offers.
How Chapter 13 Bankruptcy Removes Your Second and Third Mortgage
Usually, chapter 13 allows you to restructure your finances under a repayment system that lasts for three to five years. However, the duration varies depending on whether your income is above or below the median.
A median score is an average value of most income earners in California that provides equal numbers of income amounts above and below it. Hence, it serves as the general average used to gauge your income position. If you are below the median, your repayment period reduces to a three-year maximum. Conversely, if you are above the median, you will receive the five-year maximum period.
Chapter 13 bankruptcy applies the lien stripping system to remove your second and third mortgages by nature of depletion. The lien stripping system prioritizes repayment of secured debts first to prevent the adverse repercussions of having your home undergo foreclosure. However, you must meet two requirements under chapter 13 bankruptcy for lien stripping to work in your case:
Your Home Should be Underwater
As discussed, your home equity may be the determinant between a successful and unsuccessful removal of your second and third mortgage debts. If your house’s equity value is less than the amount you owe your second and third mortgage, the lien stripping system will treat the mortgages as unsecured by an existing first mortgage that receives priority.
Usually, your bankruptcy lawyer may advise you to obtain services from a professional home valuer who would affirm the fact that selling your house would not yield enough money to pay off the second or third mortgage.
You Should Be In a Position to Complete a Repayment Plan
Despite the effectiveness of chapter 13 bankruptcy in easing your financial burden, the bankruptcy court will order you to pay your creditors a specific amount to cater to the losses caused. As mentioned, the payment plans provide a reasonable period to complete the transactions, to release you from the financial obligation you owe to the creditor.
Proving that you can complete your repayment plan is crucial, as the bankruptcy court works for the creditor’s benefit instead of yours. The judge, therefore, needs assurance that you will follow through with timely payments. Thus, the need for security makes it a mandatory requirement to show that you have a reliable income source to provide money for the debt repayments.
When the judge asserts that you have met the criteria for lien stripping, the process can proceed. The procedure allows the first mortgage debtors to reclaim the debt you owe. The top priority creditors include those you borrowed loans to maintain your living expenses like bill payments. Any other secured loans you may have taken out with your house as collateral as a first mortgage also falls within this category.
Once you have completed the priority repayments, lien stripping applies to your advantage by letting the second and third mortgage creditors receive the small balance that remains. Since the balance will be insufficient to clear off the remaining debt, the court will declare it unsecured.
Consequently, the second and third mortgages will be done away with under chapter 13 bankruptcy, as they are not in a position to demand any more money from you. Therefore, you will retain your home and benefit from the repayment plan availed to people who file for chapter 13, where you will settle the small remaining debt to the second and third mortgage creditors over the three to five year period.
Find a Bankruptcy Lawyer Near Me
After an unsuccessful repayment scheme, dealing with different creditors can be taxing, especially if you have limited alternatives for your predicament. Overall, when settling on mortgage repayment options, your goal will be to retain your house and secure it from second and third mortgage creditors as you follow through with a reliable payment plan under chapter 13 bankruptcy. To access the full benefits of filing for bankruptcy, we recommend working with a bankruptcy attorney who is conversant with the various requirements and settlement plans for different bankruptcy types. In doing so, you will save yourself from the stress you might otherwise face when following up on your matter individually.
At Los Angeles Bankruptcy Attorney, you will have access to excellent legal services related to filing for bankruptcy and securing your property from creditors. With our help, you can remove second and third mortgages, as you benefit from the lenient payment system available in chapter 13 bankruptcy. If you need bankruptcy services in Los Angeles, California, call us today at 424-285-5525.