Debts
What happens to a second mortgage or HELOC in bankruptcy?
Bankruptcy treats the personal debt and the lien on your home separately. A Chapter 7 discharge can end your personal liability, but the lien stays on the home, and the Supreme Court has held that Chapter 7 cannot be used to void a junior mortgage even when the home is worth less than the senior mortgage. In Chapter 13, courts have allowed a plan to remove a junior mortgage that is wholly underwater, and only when the plan is completed.1 2 3 4
Connect to a bankruptcy lawyerA second mortgage or home equity line of credit (HELOC) is a debt and a lien on your home at the same time. This guide explains what each chapter does with both, and the limited case where a junior lien can be removed.
General information, not legal advice. Rules and amounts change; check with a lawyer or the court before you act.
In this guide
Why are the debt and the lien treated separately?
A secured debt is one backed by a mortgage, a pledge of collateral or another lien. A second mortgage or HELOC that is secured by your home gives the lender a lien that sits behind the first, or senior, mortgage.5
A discharge releases you from personal liability. A valid lien that is not removed in the bankruptcy case remains on the property afterward, and the lender may enforce it to recover the property.1
What happens to a second mortgage or HELOC in Chapter 7?
The discharge can end your personal obligation to pay the loan. The lien is not affected, so a lender that is not paid may still be able to foreclose on the home after the case.1 6
Chapter 7 is also not a way to remove the lien. In Bank of America v. Caulkett, decided June 1, 2015, the Supreme Court held that a debtor in a Chapter 7 case may not void a junior mortgage lien when the debt owed on a senior mortgage is more than the current value of the home.2
Chapter 7 does not involve a repayment plan, so it offers no built-in way to catch up on missed payments over time.6
A home equity line can also stop working as a source of cash. Federal rules let a HELOC lender block further draws or cut the credit limit while it reasonably believes you cannot repay because of a material change in your finances, so do not plan on drawing from the line during a financial crisis.7
What happens in Chapter 13?
Chapter 13 can stop foreclosure proceedings and lets you catch up on missed mortgage payments over time through the plan, while you keep making the regular payments.8 9
The general rule is that a plan may change the rights of secured creditors, but not those of a creditor whose claim is secured only by your principal residence. A second mortgage with any value behind it is protected by that rule.9 3
The exception turns on the home's value. In bankruptcy a claim is secured only up to the value of the creditor's interest in the property. A bankruptcy court in Wisconsin noted in a 2014 decision that every federal court of appeals to consider the question had held that a Chapter 13 plan can eliminate a wholly underwater lien on a principal residence, meaning a junior mortgage on a home worth less than what is owed on the senior mortgage.10 3
| Situation | What the law allows |
|---|---|
| Chapter 7, whatever the home is worth2 | The junior lien cannot be voided; it stays on the home |
| Chapter 13, and the home is worth more than the senior mortgage balance, even slightly3 | The plan cannot modify the junior lender's rights |
| Chapter 13, and the home is worth less than the senior mortgage balance3 4 | Courts have allowed the plan to treat the junior loan as unsecured and remove the lien when the plan is completed |
How does removing a junior lien in Chapter 13 work?
It is a court process, not an automatic result of filing. Practice varies from court to court, and the federal courts advise consulting an attorney about how secured claims are treated in a plan.8
Timing matters if you had a recent Chapter 7. No Chapter 13 discharge is available if you received a discharge in a case filed during the 4 years before the new case, and a lender keeps its lien until the debt is paid or you receive a discharge. Ask a lawyer how your court handles a lien in that situation before you rely on stripping it.11 4
- Make the request properly. It may be made by motion, in an objection to the lender's claim, or in the Chapter 13 plan. If it is made in the plan, the plan must be served on the lender in the same way as a summons and complaint.12
- Pay the plan. The junior loan is then paid with your other unsecured debts, which a plan does not have to pay in full.8
- Finish the plan. A secured creditor keeps its lien until the debt is paid or you receive a discharge, and if the case is dismissed or converted before the plan is completed, the lender keeps its lien.4
What if you do not want to keep the home?
A Chapter 13 plan may provide for surrendering collateral to the lender. In Chapter 7, the discharge releases you from personal liability for debts that arose before filing, which generally includes what you owe on a second mortgage or HELOC.4 1 13
If someone else signed the loan with you, your discharge does not release them.14
Common questions
Can Chapter 7 remove a second mortgage?
No. The Supreme Court held in Bank of America v. Caulkett that a Chapter 7 debtor may not void a junior mortgage lien even when the senior mortgage debt is more than the current value of the home. The discharge can still end your personal liability.2 1
Can Chapter 13 remove a second mortgage?
Courts have allowed it when the junior mortgage is wholly underwater, meaning the home is worth less than what is owed on the senior mortgage. The lender keeps its lien if the case is dismissed or converted before the plan is completed.3 4
Do I still have to pay my HELOC after a Chapter 7 discharge?
The discharge ends your personal liability, but a lien that was not removed stays on the home, and the lender may enforce it. If you want to keep the home, the lien still has to be dealt with.1
Can my HELOC lender freeze the line when I am in financial trouble?
Federal rules allow a lender to stop further draws or reduce the limit while it reasonably believes you will be unable to repay because of a material change in your financial circumstances.7
What if my home is worth slightly more than my first mortgage?
Then some value in the home backs the junior lien. Where that is the case, a Chapter 13 plan cannot modify the junior lender's rights.3
Sources
Official courts & government references- Discharge in Bankruptcy - Bankruptcy Basics (uscourts.gov)
- Bank of America, N. A. v. Caulkett, 575 U.S. 790 (2015), United States Reports (supremecourt.gov)
- Monroe v. Seaway Bank & Trust Co., Adv. No. 13-02747 (Bankr. E.D. Wis. Apr. 25, 2014) (wieb.uscourts.gov)
- 11 U.S. Code § 1325(a)(5)(B)(i) (Cornell LII)
- Glossary of Legal Terms (uscourts.gov)
- Chapter 7 - Bankruptcy Basics
- 12 CFR 1026.40 Requirements for home equity plans (eCFR)
- Chapter 13 - Bankruptcy Basics
- 11 U.S. Code § 1322(b)(5) (Cornell LII)
- 11 U.S. Code § 506(a)(1) (Cornell LII)
- 11 U.S. Code § 1328(f)(1) (Cornell LII)
- Federal Rules of Bankruptcy Procedure, Rule 3012 (Cornell LII)
- 11 U.S. Code § 727(b) (Cornell LII)
- 11 U.S. Code § 524(e) (Cornell LII)