One of the trickier aspects of loan modification involves second mortgages. Before the market plummeted, many lenders offered 100% financing programs, through the 80/20 program. A first mortgage would be given for 80% of the sales price and a second mortgage would be given for the additional 20%. When lenders started foreclosure proceedings, the second mortgages were often written off as losses since property values declined so quickly.

In an effort to stall foreclosures, many homeowners would file bankruptcy prior to the sale date, which in essence held up the foreclosure for a few months.

Bankruptcy laws allow judges to approve certain loan modifications and even give them authority to remove or "strip" the second mortgage lien. This process is only approved under certain circumstances. It is available to those trying to reorganize their debts under a Chapter 13 bankruptcy.

A Chapter 13 allows the court to reorganize a persons debt, but they cannot change a homestead mortgage. There are certain sections of bankruptcy laws that clearly state that a debt or lien is only secure to the extent of the asset's value. If there is a second mortgage that exceeds the value of the property, than that debt technically is unsecured.

If you purchased with a 100% financing program, or if you obtained a second mortgage prior to the market crash, you have a fair chance of getting if removed. The court will probably require an appraisal to determine the current property value and it is possible that your second mortgage company might file a motion opposing it. It's not the norm, but it can happen. Once you have the court's approval and have made your payment plans you can get a discharge from the court which in essence extinguishes the second mortgage.

Many laws vary from state to state. Before filing any sort of bankruptcy, it is in your best interest to consult with an attorney specializing in bankruptcy. Everyone's situation is different and there is no one size fits all plan when modifying.

By: Lindsy Emery

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