It’s common for people considering filing a Las Vegas bankruptcy to have a second mortgage on their homes when the first one is already underwater; in other words, they owe more on their first mortgages than their houses are worth, leaving zero equity in their second mortgages or home equity lines of credit. They have many options for how to handle this situation, including discharging it in bankruptcy. Here are the pros and cons of settling an underwater second mortgage.
1. If you are delinquent on payments the creditor knows you are in trouble. If that’s the case, then it knows that you have options that will allow it to make nothing, e.g. going into foreclosure or filing bankruptcy. Consequently, the lender may be quite happy to receive ten to fifteen cents on the dollar rather than lose everything.
2. If your financial situation is precarious but not so much that you will be forced into bankruptcy, then you can use the threat of bankruptcy as leverage in negotiations with the second creditor. The settlement won’t appear on your credit score, and you’ll be able to refocus your earnings on rebuilding your equity in your primary mortgage.
3. Similarly, if the settlement keeps you out of foreclosure, so much the better. Nothing makes life more difficult than a foreclosure on a credit report.
4. If you suffer a foreclosure, the deficiency can stay on your credit report for a very long time, and creditors have the advantage of long statutes of limitations to collect on them. Settling the mortgage prevents being hunted down by zombie debt collectors later.
1. If you or your partner loses a job or suffers an injury, then the settlement will mean nothing in the face of the lost income. At that point, you will likely have to file bankruptcy.
2. The second mortgage is unsecured, which means it is fully dischargeable in bankruptcy. Fearing the consequences of bankruptcy is far worse than paying more on a mortgage when you don’t have to.
3. Some lenders will refuse to settle if you are current on your payments. To them, you just entered into a bad deal and must deal with the consequences.
4. People settling on mortgages will be surprised to know that they must pay income tax on the forgiven sum. This comes in the form of the dreaded IRS From 1099-C. In these circumstances bankruptcy may be better.
Settling with a second mortgagee may help homeowners, but bankruptcy is still probably the better option over the long term. It helps to have an experienced Las Vegas bankruptcy attorney at one’s side.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Freedom Law Firm Las Vegas bankruptcy attorney for a free initial consultation. Call us today at 702-903-1354.