Bankruptcy Options for a Second Mortgage on Foreclosed Investment Property

Investment property is seen differently through the eyes of the bankruptcy courts than a primary residence or home. In most cases in all United States bankruptcy courts investment property, especially when filing a Chapter 7 bankruptcy, is not protected as an exemption from the bankruptcy. It is important to understand that in a Chapter 7 bankruptcy the mortgage holder, either of a first or second mortgage, can take the property if the mortgage was behind or delinquent at the time of filing.

Does Foreclosure Always Occur with Bankruptcy?

This question often depends on the type of rental or investment property. If the bank or financial institute thinks that the property can be resold then foreclosure will typically occur during the bankruptcy. However, if the bank doesn't think the property can be sold or rented, they may choose to leave it with the homeowner. This means that the homeowner is still legally responsible for repairs, taxes, maintenance and insurance for the property. If the homeowner fails to meet these requirements he or she can be sued by the mortgage holder.

Options To Consider

The mortgage holder may be open to addressing different options for bringing the mortgage payments current or modifying the mortgage loan. If this is a second mortgage the first mortgage loan will also need to be modified or brought current, which can be difficult to coordinate if there is more than one lender or mortgage holder.

Other options to consider can include:

Decreasing the interest rates on both mortgages to allow the investor to make smaller payments
Agreeing on a lump sum payment that is completed now as well as a second lump sum payment at the end of the loan
Surrendering the investment properties and being relieved of the debt

Legal Information is Essential

In any type of bankruptcy professional, current and accurate legal information is crucial. In some investment property bankruptcies the investor may be responsible for deficiency judgments even after the foreclosure has occurred. These deficiency judgments are the amount of difference between the mortgage cost to the lender and the amount recovered through selling the property, which can be substantial in some cases. Working with an attorney will ensure that you have the information you need to decide which options for bankruptcy on investment property are in your best interests.

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