Second Mortgage Settlement
Household debt has hit a record $14.3 trillion in the United States, and people all over the country are struggling under the burden of mortgage debt, credit card debt, student loans, second mortgages and foreclosure. If your world has been turned upside down by crippling debt and you can’t meet your financial obligations, contact our reputable debt settlement attorneys at ibankruptcyattorneys.com to find out how to get rid of your second mortgage debt or other debt. We have years of experience representing clients in debt settlement and bankruptcy proceedings in Los Angeles and throughout Southern California, and we will work tirelessly to help you find the debt relief solution that puts you on the path to financial freedom. We understand how stressful it can be to feel overwhelmed by debt you can’t afford to pay and we also know how devastating it would be for you to lose your home to foreclosure, which is why we recommend letting our compassionate and competent legal team assist you in finding true debt relief.
What Does it Mean to Have a Second Mortgage?
A mortgage loan is a secured loan, meaning the loan is tied to a specific piece of property, i.e. your home. When you take out a mortgage loan, you put up the purchased home as collateral on the loan, and if you fail to make timely payments on your mortgage, the bank has the right to seize the property and sell it in a foreclosure sale. Many homeowners in the United States have not one but two (or even three) mortgages on their home. A second mortgage is exactly what it sounds like – another loan taken out against a property that is already mortgaged. A second mortgage will either be a home equity loan or a home equity line of credit (HELOC). This second mortgage is secured by the equity in the property, and in some cases, it may be possible to get rid of the second mortgage in order to lower your monthly payments and reduce your overall debt by a significant amount.
Negative Equity/Underwater Mortgages
Many homes these days are “underwater” or have “negative equity,” meaning the principal balance owed on the original mortgage exceeds the fair market value of the property, or the amount a reasonable buyer is willing to pay for the property. A house that is underwater poses a number of problems for the homeowner. Under normal circumstances, a homeowner who is unable to make their mortgage payments could sell their property and use the proceeds from the sale to repay the amount owed on the loan. However, if the outstanding balance on the loan is higher than the market value of the home, selling the home would not generate enough funds to pay back the loan in full. Furthermore, many troubled homeowners have second mortgages on their homes, which are based on property value. If you have a second mortgage on your home and your home has decreased in value or you have defaulted on your first mortgage, your second mortgage will no longer be secured.
What is a Second Mortgage Settlement?
Similar to a credit card settlement, a second mortgage settlement is an agreement between you and your mortgage holder, in which the mortgage holder agrees to resolve the balance on your mortgage for less than the full amount you owe. In return for a partial lump sum payment on the mortgage loan, the lender releases its lien or security interest in the home, as well as any claim it has against you in terms of the outstanding debt, known as the deficiency. A deficiency judgment is a judgment lenders can pursue against borrowers to recover the difference between the balance owed on the mortgage loan and the amount generated through a short sale or a foreclosure sale. However, borrowers who successfully negotiate a second mortgage settlement with their lenders no longer owe any money on the settled debt and lenders who agree to mortgage settlements are barred from attempting to hold borrowers liable for the unpaid portion of their debts.
Benefits of Second Mortgage Settlement
If your home is underwater and you are delinquent on your mortgage, proposing a second mortgage settlement may be the most effective way for you to resolve the debt, free up some cash and improve your ability to sell the home. The most significant advantage of a second mortgage settlement is that you can get the lender to release its lien or security interest in your property by paying a percentage of what you owe on the mortgage, possibility as little as 30-40% of the principal balance on the loan. Furthermore, settling the debt reduces your debt-to-income ratio, which could help improve your credit score, and you don’t have to worry about the unresolved deficiency coming back to haunt you later on.
Now, you are probably wondering why a lender would ever agree to settle your second mortgage debt rather than suing you to collect on the debt or waiting for the home value to improve. The answer is simple. Like any lender, mortgage holders want to maximize their profit. A second mortgage holder or junior lienholder is second in line behind the first mortgage holder and could risk losing its security interest in the property if the first mortgage holder forecloses.
If your house is worth less than what you owe on your first mortgage and you have defaulted on the loan, the lender can force a foreclosure sale. However, there will no longer be a security interest for the amount owed that is higher than the value of the home. In that case, a foreclosure sale would not produce enough funds to pay off even the first mortgage holder, and the junior lienholder (second mortgage holder) would be left with nothing. By agreeing to accept a partial payment as fulfillment of the debt, the second mortgage holder can avoid losing its security interest in the event of foreclosure or bankruptcy.
Can I Settle My Second Mortgage Debt?
For many troubled homeowners, a debt settlement is the fastest and easiest way to reduce their debt, but it isn’t an option for everyone. Your ability to successfully settle your second mortgage debt will depend on the state of your finances, your lender’s willingness to work with you to settle the debt, and the quality of your legal representation. Our debt relief attorneys at ibankruptcyattorneys.com have successfully negotiated debt settlements and second mortgage settlements for clients in Los Angeles and throughout Southern California, and we can help you navigate the mortgage settlement process.
Will I Owe Taxes on the Forgiven Debt?
An important consideration when weighing the benefits and drawbacks of a second mortgage settlement is whether or not you will be required to pay income tax on the balance of the loan that was forgiven or cancelled. Typically, forgiven debt is taxed as income by the IRS, and if you are already struggling to pay your bills, facing tax liability for a second mortgage settlement can be an added financial burden. Fortunately, the IRS permits an insolvency exemption, which applies to taxpayers whose total liabilities exceed their total assets. If you qualify for the insolvency exemption, the debt forgiven in your settlement may be excluded as income. Before making any final decisions about settling your debt, consult a knowledgeable Los Angeles debt relief attorney to find out if there are any other potential challenges you may not have considered.
Mortgage Debt Relief Through Bankruptcy
While a second mortgage settlement may be the best debt-relief option for some Los Angeles homeowners, there is no single answer to all borrowers’ mortgage debt difficulties. If you discuss the pros and cons of a second mortgage settlement with your attorney and come to the conclusion that it is not the right decision for you, your attorney can help you find another alternative, such as loan modification or bankruptcy. If you have a second or third mortgage on your home, you may qualify for Chapter 13 bankruptcy, which could allow you to strip the junior liens off your property and recategorize the secured debt as unsecured.
This option only works if you can prove to the court that your home is worth less than what you owe on your first mortgage, which is where the expertise of a knowledgeable Los Angeles bankruptcy attorney comes in. If your motion is granted by the court, the balance owed on the second mortgage loan would be treated the same as any other type of unsecured debt, such as credit card debt or medical bills. You and your attorney would propose a repayment plan to pay back your creditors over time, usually during a period of three and five years, and once you complete the repayment plan, any remaining unsecured debt would be discharged or wiped out, including any balance remaining on the mortgage loan.
If you file for Chapter 13 bankruptcy in Los Angeles, there is a good chance you will only pay back a small percentage of what you owed on your second mortgage, which is an incentive for the mortgage holder to work out a settlement agreement with you and collect a portion of what you owe, rather than risk losing nearly all of it in bankruptcy. Chapter 13 bankruptcy can also help you fend off foreclosure and stay in your home, as well as temporarily “stay” or stop harassing creditor calls and other collection actions by creditors or debt collection agencies attempting to collect on debts you owe.
Why Hire a Los Angeles Debt Relief Attorney?
As you can see, you have several options to consider when dealing with a home that is underwater and a second mortgage you can’t afford to pay, which is why it is important to consult an experienced attorney who can examine your financial situation, taking into account your income, expenses, assets and debts, and determine which debt relief solution best suits your current needs and your future financial goals. Banks and other financial institutions can be aggressive in collecting on debts they are owed. After all, your mortgage holder took a big risk by lending you a large amount of money to purchase your home, and it isn’t afraid to take advantage of its right to seize your property if you fail to make payments as agreed upon. That is one of the main reasons we recommend consulting an attorney when considering a second mortgage settlement.
At ibankruptcyattorneys.com, our attorneys have extensive experience negotiating with mortgage holders. We know exactly what you are up against and how to improve your chances of a successful settlement. When you hire our firm, we will represent you against your mortgage holder and work to negotiate a significant reduction in what you owe on your second mortgage. Unlike a debt settlement company, we can provide legal representation in all matters related to bankruptcy and debt settlement. One of the most important takeaways here is that while settling your second mortgage debt can be difficult, it isn’t impossible. Our Los Angeles bankruptcy attorneys and bankruptcy firm proudly serves the good people of Los Angeles and Southern California and we offer a free initial consultation, so don’t hesitate to call.
Contact Our Second Mortgage Settlement Attorneys in Los Angeles
Depending on your financial situation, you may find it difficult to make monthly payments on your second mortgage. If you are dealing with significant debt that is causing you to feel stressed and uncertain about your financial future, you are not alone. Homeowners all over the country have mortgage loans they can’t afford to pay or homes that are underwater, and are wondering what they can do to reduce their debt and put themselves on better financial footing. When you are drowning in debt, it can be difficult to see a way out, which is why our debt relief attorneys at ibankruptcyattorneys.com are so committed to helping homeowners with second or third mortgages find a workable solution that resolves their overwhelming debt. Even if a foreclosure seems unavoidable, you have options to save your home and get out from under your crippling debt.