As an Indianapolis bankruptcy attorney, a common question I'm asked during the bankruptcy consultation is, “Can I get rid of my second mortgage or home equity line of credit if I file bankruptcy?”

With the condition of the current housing market, many homeowners have discovered their homes are worth far less than they owe.  To make matters worse, many homeowners opened either home equity loans or lines of credit against their house when the market value was much higher.  Now they not only face a home worth less than their first mortgage, they also owe on their equity loan(s) as well.

However, there is hope for these homeowners.  It is possible, in a Chapter 13 bankruptcy, to discharge a second mortgage, equity loan or equity line of credit, if the value of the home is less than the amount owed on the primary mortgage.  For example, a person who owns a home that is currently worth $95,000, but owes $100,000 in a first mortgage and borrowed $20,000 against a home equity line of credit, may be able to avoid the home equity line of credit completely and have it discharged at the completion of their Chapter 13 bankruptcy.  However, if, in the same situation, the home is worth $105,000 (which is more than the amount owed on the first mortgage), the home equity line of credit is non-dischargeable.

As you can guess, getting the home valued is very important since it determines whether or not the home equity loan is dischargeable.  Proof of the current value can be determined in multiple ways; such a having a market analysis performed by a real estate agent, having the home appraised or possibly even using the property tax assessment.  If the home value is close to the amount of the first mortgage then the debtor and his/her bankruptcy lawyer must be prepared to justify the valuation - which is why it’s important to have a knowledgeable bankruptcy attorney assisting you with your bankruptcy.