In the recent real estate boom of the last few years, many homeowners applied for and received second mortgages. These may have been in the form of Home Equity Lines of Credit (HELOCs) or as a 20% down payment loan for an 80/20 mortgage. When the house begins to go into foreclosure as the homeowners default on the first mortgage, though, there are different courses of action that the mortgage company can take, and foreclosure victims will have a number of options to solve the problem. But homeowners will need accurate foreclosure advice when they are facing the possibility of both mortgages going into foreclosure. This may seem like one of the few times when bankruptcy to stop foreclosure is a good idea to save the home and preserve some of the homeowners' credit, if they can avoid two separate foreclosures.

In most cases, the second mortgage will either file foreclosure, or they will desperately try to work with the homeowners to avoid foreclosure altogether. When the mortgage company files foreclosure, it is to protect their interest in the property and start accelerating their own fees and interest, so that they can grab a piece of the proceeds from the sheriff sale. However, they will do this only if they are expecting the property to sell for enough to pay off the first mortgage and second mortgage. In a foreclosure auction, the proceeds are used to pay off any property taxes first, then the first mortgage, and then any other liens (second mortgages, judgment liens, etc.) in the order in which they were filed with the county. Thus, if there are no expected proceeds to pay off the second mortgage, there is little reason for the lender to attempt to foreclosure on the house.

Thus, this rarely happens, since the proceeds from sheriff sales typically do not pay off the first mortgage in full, let alone any of the second. In this case, the second mortgage company will work with the foreclosure victims and may be willing to accept less as a payoff in order to help them sell the property at a short sale (for less than the total amount owed). The lender knows they will most likely get nothing from the foreclosure auction, so it is worthwhile for them to accept anything for the loan, instead of lose everything. Second mortgage companies have been known to take as little as 10% of the total owed, because this is 10% more than they would receive at the foreclosure auction.

Even though there may be little danger in facing two foreclosures at once, homeowners are often advised to file bankruptcy to prevent this possibility. They would be able to establish a repayment plan that includes both loans and be given protection under the law in order to pay back the arrears. However, as noted above, the second mortgage may be much more willing to work with the homeowners to come to a solution that allows them to keep the home, even if the lender has to accept less as a total payoff, or give the foreclosure victims more time to get back on track with the monthly payments. Filing bankruptcy will not allow the homeowners to work directly with the mortgage companies, and may eliminate some of their options to negotiate with the second mortgage holder.

In terms of what bankruptcy can actually be used for, it can be a good option to stop the foreclosure process if the homeowners are out of time before the sheriff sale. Filing bankruptcy immediately puts the foreclosure process on hold, stopping the auction in its tracks. The repayment plan is usually quite expensive, though, and the homeowners will not have any extra income with which to save an emergency fund, or pay for any other financial setbacks that come along. All discretionary income must be applied to the debts that are included in the bankruptcy. For these reasons, foreclosure victims are typically better off looking at other options to stop foreclosure, before considering bankruptcy. A short sale or forbearance agreement with the first mortgage may get them back on track without the negative credit affects of having a bankruptcy and a foreclosure.

It is important for homeowners to do some research on what options they have available, besides bankruptcy, and try working with both lenders for a solution. Mortgage companies would like to avoid both bankruptcy and foreclosure, if there is a solution that will allow for that outcome. They may even be willing to postpone the sheriff sale or accept a short sale, rather than go through a lengthy legal process in the courts. Both of them are more interested in getting their money, not on foreclosing on the house, taking a loss on the mortgage, and having to sell a property in a depressed real estate market. It is in all of the mortgage companies' interests to find a solution to foreclosure.

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