What Is Mortgage Bifurcation?

Fittingly for a term that refers to splitting something into two pieces, mortgage bifurcation could actually refer to two completely different things. In a bankruptcy court, mortgage bifurcation is the process of forcing a balance reduction by splitting a loan into secured and unsecured halves. Outside of bankruptcy, bifurcation refers to separating a mortgage from the underlying trust deed.

If you file for a chapter 13 bankruptcy where you reorganize your debts, the court has the option of splitting your secured debts into two pieces. A secured portion of the debt stays with the property, while an amount that you owe that is higher than the value of your collateral gets turned into unsecured debt and potentially released. Also known as a "cramdown," mortgage bifurcations aren't allowed on your primary residence's first mortgage.

While you can't bifurcate the first mortgage on your primary home, any other mortgage is fair game in a Chapter 13 bankruptcy. The court can bifurcate second or third mortgages or home equity lines of credit. It can also bifurcate a first mortgage on a second house, as well as a car loan on an upside-down vehicle.

Your home loan is actually made up of two pieces. When you took out your loan, you signed a promissory note in which you promised, hence the name, to pay the lender's money back. To turn your house into collateral that the lender could take without having to go through a collection lawsuit or having to worry about your homestead rights, you also gave your lender a mortgage or trust deed. That security instrument formalized your lender's rights to the home. Normally, those two documents -- the note and the mortgage -- should stay together, both in the lender's possession.

However, sometimes, the mortgage and the note get split up. Given that lenders frequently sell notes to other lenders, it's natural that this could happen. When the ownership of the note and mortgage get split, creating a "naked mortgage," it can be harder for the lender to foreclose. Further complicating matters, many lenders coordinated their loan transfers through a third-party, Mortgage Electronic Registration System, Inc. Until 2011, when MERS stopped being involved in foreclosures, loans involving MERS were in a state of legal limbo, with some states not allowing MERS to be involved in the process. If you're in foreclosure, bifurcated mortgages can still be good enough for a court to allow a lender to foreclose, but it's never a bad idea to get some expert help to understand where you sit.