Once a primary mortgage is underwater (i.e., the payments left on the mortgage are higher than the total value of the house), the second creditor holding the second (or higher) mortgage is in a precarious situation. At this point the homeowner has plenty of options in this situation, including discharging it in bankruptcy and then stripping the lien in Chapter 13. Another option is to settle the second mortgage with the bank. This option has its benefits and drawbacks.
On the “benefits” side, it’s one thing if you’re making the payments, but it’s another entirely if you’re falling behind. If you file bankruptcy, the bank loses its loan, and worse, if your house goes into foreclosure, then it gets zip. Thus, it may very well be willing to settle on your mortgage for maybe ten to fifteen cents on the dollar. If you hire a New York bankruptcy lawyer, you can even use the threat of bankruptcy as a bargaining tool. The benefits of the settlement are that it won’t appear on your credit score, which is a far better alternative to a foreclosure appearing on it, and you’ll be able to start rebuilding equity in your home. Finally, if your house does end up in foreclosure, the deficiency can stay on your credit report for many years, allowing the creditor ample time to collect on them, so a settled mortgage reduces the likelihood that you’ll be hounded by debt collectors.
As for drawbacks, given the precarious situation, a settlement is only as good as your income is secure. If you lose your job, or your partner does, then the settlement will fall apart and bankruptcy will be the only option. Conversely, settling a mortgage depends on the creditor’s assessment of your situation. If you’re current on your mortgage payments and there’s no reason to believe your income will go away any time soon, the bank is unlikely to agree to a settlement. Finally, if you settle on a mortgage, you will have to pay income tax on the forgiven sum, so the better the deal you get, the more you’ll end up paying in income taxes. Just don’t be surprised if you receive an IRS 1099-C form from the bank. If the prospective income tax you’ll pay is high, then bankruptcy may be a better option.
Settling an underwater second mortgage can go either way for homeowners, so every situation is different. Consequently, it’s a good idea to have an experienced New York bankruptcy attorney look your case over, especially if you’re considering filing in Chapter 7 or Chapter 13.
For more questions about settling underwater mortgages, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced landlords rights in bankruptcy Bruce Weiner for a free initial consultation.