Think Again Before Walking Away From Second Trust Deeds In Bankruptcy

Banks and credit unions routinely walk away from second trust deeds where there isn't enough equity to cover the outstanding loan balance plus interest, arrears, costs of sale and attorneys' fees. This is especially true where the borrower files a chapter 13 bankruptcy case, which allows certain secured liens to be completely avoided.1

But there is no reason for banks or credit unions to unknowingly and prematurely walk away from second trust deeds that are given special protections in bankruptcy.

The problem for borrowers who file a chapter 13 bankruptcy case is the "anti‐modification provision" of Bankruptcy Code section 1322(b)(2), which protects second trust deed holders from having their loans modified if both: (1) the property securing the lien is the debtor's principal residence and (2) there is any value, even $1, to support the lien.2