Bankruptcy and 1st/2nd mortgage

[ajpow365]

A friend is nearing the end of her redemption period on her mortgage. A while back, she had taken out a 2nd mortgage w/ a local bank. During the filing, there were errors and the new 2nd lien holder DID NOT subordinate to the first. Therefore, the current "first mortgage" on the property is the smaller amount of the two. Something like 35K on the first now and 190K on the second.

The friend is looking for a new place to live as she is nearing the end of the redemption period as stated earlier. She has found a property where the owner will provide a Contract-for-Deed opportunity on another property he has purchased and refurbished, for two years while she rebuilds her credit. During a discussion with the this property owner, my friend revealed to him her situation regarding her current home. He "threw out" the idea of possibly purchasing her current property for what was owed to the local bank (the holder of the "first" lien, the one for around $35K) then sell it to my friend for around $55K. Then she could stay in the home and he would make a little profit.

What happens to the 2nd mortgage holder in this situation? The are owed the most. Is the scenario above a possibility? Sounds too good to be true.

[Lana]

No it's not that easy. Promissary notes get discharged in BK. However the collateral does not. No matter how it went down the first has a lien for the 190, and the second ( or first now, it doesn't matter ) have their liens.
They'll still collect the property, subject to the liens.
If the second didn't file correctly, that is their problem. The first still has their 190k lien. The second still has their 35k. The property is still subject to 125k of liens. BK doesn't affect that.

[SunshineGal]

I'm not understanding your post. The lien goes by recording date of the mortgage. If your friend took out a second mortgage after the actual 1st mortgage, there would be no reason for the second to sign a subordination agreement as they were already in 2nd lien position.

If the 1st mortgage was refinanced, then the 2nd would have to subordinate as the 2nd would then have the earlier recording date. If the redemption lien was only for the amount past due, then it's possible it could hold a 3rd lien position.

[ajpow365]

That may be bad info (the subordination) on my part. You are correct..and I'm guessing they did indeed re-finance their 1st after their 2nd.