Can a Second Mortgage Holder Force a First Mortgage Holder to Foreclose After Bankruptcy?

A second mortgage holder usually cannot force a first mortgage holder to foreclose after bankruptcy, but the second mortgage holder may be able to foreclose. Some homeowners mistakenly believe that a second mortgage holder cannot initiate a foreclosure. They also may mistakenly believe that money owed will be forgotten and that the second lender just goes away after bankruptcy.

Lien Priority

When you buy a home with a mortgage loan, the lender places a lien on your property as security for repayment of the loan. Your home becomes collateral (security against the loan) for the mortgage. The first mortgage holder is known as the senior lien holder, which means in the event of foreclosure or bankruptcy, the first mortgage takes priority over all other liens against the property when it comes to getting paid. The first lien holder would only be superseded by a tax lien. If you obtain a second mortgage for home improvements or debt consolidation, the second mortgage holder also places a lien against your property, and the loan is secured in much the same fashion as the first mortgage.

Second Mortgage Holders

If you have defaulted on second mortgage payments but are current on your first mortgage, the second mortgage holder can initiate foreclosure. Because many properties sell for less than the outstanding mortgage amount at a foreclosure auction, the second lien holder is unlikely to get any of its money if it does choose to foreclose. For the second mortgage holder, it is known as foreclosing subject to the first mortgage. Another option is for the second lender to buy out the first lender, to protect its interest in the property, but this is only beneficial if there is significant equity in your home.

After Bankruptcy

Frequently, with a Chapter 13 bankruptcy (reorganization bankruptcy), you are expected to make timely payments to your first mortgage holder, based on your designated three-year to five-year repayment plan. You must also make payments to the court-assigned bankruptcy trustee, who disburses the funds among your priority creditors, including a second mortgage holder. In a Chapter 7 bankruptcy (straight bankruptcy), you may be able to eliminate all or a portion of your debts, but the second mortgage holder will still have a lien against your property that must be cleared if you sell or refinance. Once your bankruptcy case is completed, the second lien holder can still initiate foreclosure proceedings to collect the outstanding debt.

Pursuing Foreclosure

Sometimes a second mortgage can be discharged (eliminated) in a Chapter 13 bankruptcy, if the first and second loan amounts are more than the current fair market value of the house. In this case, the second lien is no longer secured by the value of your property, and it would be difficult for the second lender to recoup its losses. If, however, the second mortgage holder decides to pursue the money you owe through foreclosure, the lender could create a situation in which the first mortgage holder forecloses or pays off the second lender, to protect its own interests in the property.

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