Homeowners Can’t Void Second Mortgages Through Bankruptcy
The U.S. Supreme Court recently ruled in favor of Bank of America when it unanimously decided that “homeowners who declare bankruptcy can’t void a second mortgage, even if the home isn’t worth what they owe on the first mortgage,” according to an article in the Chicago Tribune. In short, it is a big win for the banks.
Underwater Primary Mortgages and Personal Bankruptcy
How did the case come about? It involved homeowners in Florida who were underwater on their first mortgages and wanted to use consumer bankruptcy to “strip off” a second mortgage. In general, the homeowners argued that, since their second mortgages would only be paid after their primary mortgages—and those primary mortgages could be canceled in a Chapter 7 bankruptcy proceeding—the second mortgages are “essentially worthless,” according to a report in the Wall Street Journal. The lower courts that heard the cases found in favor of the homeowners, indicating that they could “nullify the second loans” on their homes through a bankruptcy proceeding.
Bank of America, however, appealed the cases. The bank contended that the property values on the homes could eventually rise, which could then mean that “the debt could someday be fully paid.” The Court agreed, and Justice Thomas emphasized that the “constantly shifting value” of real estate played into the Court’s decision. As he explained, “sometimes a dollar’s difference will have a significant impact on bankruptcy proceedings.” The bank’s advocates suggested that the decision could be the final word in what was, perhaps, “the single most important unresolved issue in consumer bankruptcy.”
Supreme Court’s Decision Could Impact Consumers
How will the decision impact consumers who seek to wipe their financial slates clean by filing for personal bankruptcy? Many consumer advocates have spoken out since the ruling, underlining how the Court’s decision “will make it harder for bankrupt homeowners to get a fresh start.” As one advocate explained, “Some consumers may be forced to catch up on thousands of dollars of payments or lose their homes.”
While Bank of America had a number of lending groups on its side, consumers were backed by organizations such as the AARP, which argued in favor of voiding second mortgages for older adults, in particular. The AARP reasoned that it is “far more difficult for older people to bounce back from enormous financial setbacks like bankruptcy or medical problems,” and that requiring payments on second mortgages could make for a very difficult retirement.
Why was the Court’s decision so pressing? When the U.S. Bankruptcy Code last underwent a “major overhaul” back in the late 1970s, second mortgages weren’t especially common. Now, however, thousands of Americans have taken out second mortgages. In the last year alone, courts saw more than 700,000 Chapter 7 bankruptcy filings. With the Supreme Court’s decision, those courts now have clarity on how to handle cases in which consumers seek to void their second mortgages through bankruptcy.
Filing for bankruptcy can be a very complicated process, and the recent U.S. Supreme Court case makes clear that homeowners may have an upward battle when it comes to Chapter 7 bankruptcy and mortgages. If you have questions about how consumer bankruptcy may be able to help your financial situation, don’t hesitate to contact an experienced Oak Park bankruptcy lawyer.
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Chapter 7 Bankruptcy as a First Choice
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