Many Tennessee residents are facing large amounts of debt. Unemployment and rising prices have resulted in sky-high levels of credit card debt, medical debt and missed mortgage payments for many people. Sometimes the level of debt is so excessive that people turn to Chapter 13 bankruptcy to get rid of it and start anew. However, it's important to know that while bankruptcy can help with many types of debt, it can't eliminate all of them. In some cases, for example, Chapter 13 bankruptcy won't get a person off the hook for a second mortgage.
Although the rising prices in the housing market usually mean good news for homeowners and sellers, they can be a disadvantage for someone who wants to eliminate their second loan through bankruptcy. While a second loan (also called a junior or senior loan) can be dissolved in a Chapter 13 bankruptcy, there is one main condition that must be met; the value of the home needs to be less than what is owed.
This means that if a person owes $50,000 on a second loan and the home is valued at $50,001, then Chapter 13 won't dissolve the loan. Even $1 makes a difference. However, on the flip side, if the home is valued at $50,000 and the person owes $50,001, then the loan can be eliminated through Chapter 13. If the second loan cannot be eliminated, a person can still get rid of third, fourth and any subsequent loans because their value is less than the second mortgage.
Although Chapter 13 is a good way to reorganize debt and make it more manageable, it does have its limits. In this case, communication with lenders and working toward a payment plan can save a person from foreclosure.
Source: FOX Business, "Can Chapter 13 Help Me Get Rid of Second Mortgage?