As we mentioned in our last blog post, bankruptcy does not mean you will automatically lose your home, but there may be some situations where a bankruptcy-even if it discharges your mortgage loans-cannot discharge the lien against your home.

When you go through Chapter 7 bankruptcy, in particular, you will be able to discharge your home loans, but lenders will retain their lien against your home, which allows them to foreclosure if they so choose. Lenders for second mortgages and home equity lines of credit are a particular concern in this regard, since they are second in line to have debt satisfied.

Individuals who have had a subordinate lender's loans discharged in a Chapter 7 bankruptcy may in fact not have to worry about foreclosure immediately. Lenders are unlikely to foreclose on a home if they know there will be nothing left over for them of the proceeds of a sale. That is especially the case in the current market, where so many homes are already underwater.

Borrowers who are considering filing for Chapter 7 bankruptcy should be aware that many states have anti-deficiency laws which prevent a subordinate lender from demanding repayment of a loan if the first mortgage lender forecloses on the home.

Finally, those who are currently going through a Chapter 7 bankruptcy should know about the possibility of "reaffirming" their home equity line of credit loans and second mortgage loans. In a reaffirmation agreement, borrowers promise to repay all or part of a debt that the bankruptcy would have forgiven. One possibility for such an agreement is that the borrower could attempt to come to a settlement with a home equity line of credit lender or a second mortgage lender in which they are allowed to sell the property. Doing so would remove the borrower's concern that their home could be foreclosed at any time and would allow them to move on with their life a bit more on their own terms.

These are just a few possibilities borrowers should be aware of when thinking about Chapter 7 bankruptcy and how it will affect loans connected to home equity lines of credit and second mortgages. Consumer protection laws are different in each state, so it is always wise to work with a local attorney.

Source: Fox Business, "Foreclosed After Bankruptcy? It's Possible," Justin Harelik, 12 July 2011.