An article in the local San Jose Mercury News newspaper brought to light an obscure provision in bankruptcy law that is getting more and more attention because of today's mortgage crisis. Would you think it possible that a second mortgage can be eliminated alltogether with no recourse or foreclosure by a bankruptcy court?
Turns out, it can happen. Bankruptcy laws don't allow eliminating the debt of a first mortgage if a homeowner plans to stay in their home. But, the same is not true of second mortgages. Second mortgages can be declared unsecured debt when there is no equity remaining after considering the first mortgage to cover them. When that happens in a personal bankruptcy proceeding, the second mortgage is put on hold and no payments are required while the homeowner completes a repayment plan for other debts, which typically takes three to five years. After doing so and the homeowner successfully emerges from bankruptcy, the second mortgage is eliminated.
Not surprisingly, mortgage bankers are not in favor of the practice, however, there is little they can do aside from trying to get the law changed. Curiously, investors in first mortgages don't appear to be supporting their mortgage banking friends. Click here to read the full story.
What do I think? My motto, good homes for good living, reflects how I feel. I think anything that gets people out of a distressed mortgage situation - legally and ethically, of course - and preserves their home ownership is a good thing. A home is a home, not an investment, and a good home is part of the foundation of stable families and positive futures. When people are more important than dollars then we're on the right road to recovery.
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