Can you file bankruptcy on a second mortgage if the value of the house has depreciated?

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Can you file bankruptcy on a second mortgage if the value of the house has depreciated?

My husband has a second mortgage on our house (home equity line of credit), can he file bankruptcy on this mortgage IF the value of the house has depreciated? When he first took this lien out, our house was worth $110,000. Our house needs some serious repairs that we cannot afford and our house is now only worth $94,000. I owe $90,000 on the first mortgage and he owes $20,000 on the second mortgage.

Asked on October 11, 2010 under Real Estate Law, Indiana

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

Be aware that you do not file bankruptcy on a given debt--you file bankruptcy on all your debts, and the bankruptcy will generally affect your assets (ch. 7), budgeting (ch. 13), and your credit rating (both types). Therefore, filing bankruptcy is a very serious option that will affect all aspects fo the filer's economic life, and should not be viewed as a way to address a single debt.

Bankruptcy does not depend on the value of the assets--it's based on cash flow and your ability to make payments. In theory, if a person can afford the payments, he or she should not file bankruptcy even if the asset is  underwater in value.

Note that bankruptcy does NOT stop a lender from foreclosing if the borrower can't make payments. It temporarily stays, or stops, foreclosure while the process works through; but mid to long term, the borrower on a primary residence loan, whether first or second mortgage, must be able to either pay or work something out with the creditor or else lose the home.

In short, it is likely that for several reasons, bankruptcy is NOT the right option here. However, if you wish to explore it as option, you and your husband should consult with a bankruptcy attorney who can advise you as to your best course.


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