Bankruptcy Law Allows Home Owners To Dump Second Mortgages

The Mercury News has a story about a legal loophole people in the Bay area in California are using to wipe out the second mortgages from their home through filing for bankruptcy. It works like this: if you want to stay in your home, the law forbids wiping out your first mortgage via bankruptcy. However, if the value of your home has plummeted and you are now under water, your second mortgage now becomes unsecured debt because your house does not have any equity in it to cover the loan. Thus, it is eligible for elimination through bankruptcy proceedings. Once bankruptcy has been declared and the repayment plan completed (which takes about three to five years - during which payments on the second are suspended), the second mortgage is wiped out.

The understatement of the year award goes to this line in the article: "Mortgage bankers don't like the practice."