If a piece of real estate has more than one mortgage attached and the owner is in the process of filing personal bankruptcy, how the mortgages and property will be treated depends upon the type of bankruptcy filing being created and the intent of the owner with regards to staying in or walking away from the property.
If the bankruptcy is to be made under a Chapter 7 liquidation and if the debtor is going to abandon the house (i.e. walk away from ownership), all debts associated with the same should be discharged — including first and second mortgages, and assuming that both mortgage debts are listed in the filed schedules.
If the case is a Chapter 7 and if the debtor wants to maintain the residence, there are mechanisms in place where a debtor could ask the court to “strip” or remove the second mortgage if that mortgage encumbers the debtor’s equity in that property. However, this “stripping” process can be complicated and it is recommended that the debtor not attempt this procedure without the assistance of an attorney. To find a local Bankruptcy attorney for FREE, see Standard Legal’s Attorney Find page.
Other chapter filings and owner intent will be reviewed by the court case-by-case to best make the creditors whole, be it first or second mortgage.
For complete forms and instructions for creating a personal filing, see Standard Legal’s Bankruptcy legal forms software.