Legal Question in Bankruptcy in Virginia

1st & 2d mortgages in bankruptcy

In a Chapter 7, either the first or the second will be able to foreclose (after thedischarge is issued or sooner if the court approves) if the debtor defaults. If the 2d pays off the first, it would either be by buying the note (making it both 1st and 2d in the total amount of the 2 loans) or by buying the property at foreclosure, which would make it the owner. The first won't sellfor much less than the loan amount, as it is fully secured. The bottom line is that thereis no way to reduce the indebtedness on the house in a 7 (if the debtor wants to keep the house) unless the creditor voluntarily agrees. The liens stay in place in full; only the ability to sue for a deficiency is discharged. In other words, if the debtor wants to keep the house, he has to keep paying both loans.

In a Ch. 13, the debtor can "strip down" the second to the value of the collateral, but only if it is secured by assets other than the debtor's principal residence (i.e., either the property is not the principal residence or it is secured by other assets as well). If the debtor is a family farmer the lien could be stripped in a Chap. 12; or it could be strippeddown in a Chapter 11. In either case, the 2ndis still secured for at least the portion of the loan secured by an interest in the property.The only way the 2nd loses its security is ifthe first forecloses. In that case, the lien is wiped out, but any surplus in the sale price after paying the first goes to the 2nd.

I practice bankruptct and real estate law in Virginia. Please feel free to contact me if you have further questions.