If you’re going through bankruptcy, it is best to speak with a lawyer who handles this type of situation. They will be able to explain the difference between a lien on an asset and a debt.
If you decide to file a Chapter 7 bankruptcy, it will usually wipe out your unsecured debt, which includes debt that’s not tied to a tangible debt such as a home or an automobile. However, if you’re like most individuals, you also have secured debts that need to be dealt with when you are involved in a Chapter 7 bankruptcy. Typically, a secured debt will include a lien on an asset like your home. When you have this type of debt, you are required to satisfy the first mortgage as well as any second mortgages or liens before you are able to sell your home.
Home Equity Line Of Credit
If you have a home equity line of credit (HELOC), it is a junior mortgage, which is a lien to a primary. This means it is tied to the property, but it has a lower priority than the first mortgage. When you file a Chapter 7 bankruptcy, it terminates your liability on both the primary mortgage and the HELOC. Unfortunately, a lien was posted against your property when you acquired this type of loan, and it is not removed.
Credit Market Alert
When a lien is placed, a lender ensures the loan payment by initiating a credit market alert. This means that if an asset transfer tries to occur, a title check will flag the lender and indicates that an outstanding loan is still pending. This will be recorded in the office of the county recorder who is in the same location where the home is located.
Chapter 7 Provides Only Personal Protection
You are unable to remove a lien when you file a Chapter 7 bankruptcy. The only benefit that a Chapter 7 brings is that it prevents the HELOC from suing you or trying to make you pay towards the loans. However, in this situation, a junior lien holder does retain a legal right to proceed with foreclosure on your property. Unfortunately, your property has zero protection from the possibility of foreclosure occurring in the future. A Chapter 7 will only protect you personally after you file for bankruptcy protection. This means that even though there may be zero equity in your property, you are prevented from selling it as the lien holder will find out.
Example Of This Scenario
For example, if your home is worth $250,000 and you have a first mortgage equal to $260,000 and a second mortgage equal to $50,000, the lender who has the second mortgage could force you to place your house up for sale. In this scenario, you would only receive what your home is worth, which is $250,000. Also, you would be obliged to hand that amount over to the first mortgage lender. This leaves you with absolutely nothing. Of course, this would not be a wise business decision. In this type of case, a junior mortgage holder will wait in hopes of an improving market where the value of your home will be higher. Unfortunately, this means that foreclosure is still on the table for you.
If negotiations reach this type of tipping point, it’s likely you will need to work a deal out with your junior lien holder. They may be able to negotiate terms where you can settle this type of debt.