Bank Foreclosure Homes Sale Leaves Out Second-Lien Holders

by Donald Hanz on Bankruptcy

Bank foreclosure homes sale in Oregon benefits only holders of first mortgages, and not holders of second-mortgages, if distressed homeowners use a certain bankruptcy strategy to reduce or wipe out their total debts.

As more Oregonian homeowners owe more than the value of their houses, more are getting eligible for a bankruptcy provision that allows them to convert their second mortgages into unsecured debts which can be wiped out in bankruptcy.

According to Oregonian bankruptcy lawyer Eric Olsen, which owns a company that has employed the second-lien strategy for many of its clients, his firm has successfully wiped out over $3.8 million worth of second mortgage loans and house equity loans for 75 of its clients this year and will be expecting another 29 clients to be helped early next year.

Olsen also added that the second-lien strategy is not known by many real estate agents, bankers and some lawyers. In order to qualify for the privilege of having a second mortgage forgiven, borrowers filing for Chapter 13 bankruptcy protection must first prove to the bankruptcy court that the amount of their mortgage loans are far above the value of their houses. This requirement has been easy to prove as nationwide, home values have dropped by about 25 percent from the level of their mortgage loans.

If the bankruptcy judge affirms the underwater conditions of the borrowers and the lenders do not challenge the filings, the judge cancels the second liens as they are converted into unsecured debts.

This second-lien cancellation strategy in case of bank foreclosure homes sale is not without damage however. Any person filing for bankruptcy will have his credit record significantly tarnished. Besides, the strategy also raises questions about morality, especially for borrowers who took out second loans to buy luxurious items such as ski boats and trendy house appliances.

Financial analysts also insist that this strategy adds another blow to the already precarious situation of distressed lenders struggling from nonperforming loans.

However, housing advocates say that the second-lien strategy is an effective way for troubled homeowners to start again and recover from the downturn and from toxic loans, particularly in cases when the federal foreclosure prevention program is not being implemented properly by lenders.

In the first two weeks of December, over 20 borrowers in Oregon have filed documents in bankruptcy courts to wipe out their debts and to save themselves from second liens in case of bank foreclosure homes sale.