Some struggling homeowners are using a little know, but increasing popular, provision of the bankruptcy code to eliminate their 2nd mortgages, giving them the possibility to stay in their homes.
Here's how it works: bankruptcy laws prevent homeowners from eliminating the debt of a first mortgage if they plan to stay in their home. But second mortgages are treated differently. They can be declared unsecured debt when there is no equity to cover them, also known as being under water. When that happens in a personal bankruptcy proceeding, the second mortgage is put on hold and no payments are required while the homeowner completes a repayment plan for other debts -- which typically takes three to five years. Once the repayment plan is completed, the debtor emerges from bankruptcy and the second mortgage is eliminated.
In many cases, homeowners are able to afford the payments under their first mortgage and are able to keep their homes.