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.
See Related Blog Posts:
Chapter 7 Bankruptcy as a First Choice

Comments

Post a Comment

Popular posts from this blog

Payday Lending and Predatory Lenders in Illinois

If you are in substantial debt in the Chicago area and are living in a paycheck-to-paycheck cycle, you may have taken out a payday loan to make ends meet. While payday lending is illegal in a number of states due to the predatory nature of these loans, it remains legal in Illinois. As a result, many debtors in the state have used payday lenders, and far too many of those borrowers cannot repay what they owe. According to a recent article from Progress Illinois , consumers have filed complaints about payday lenders in the state, illuminating a need for federal rules that address harmful lending practices . Predatory Payday Lenders and Protections for Consumers Due to the perceived predatory nature of payday loans, twelve states in the country have banned these lenders from operating completely, according to a fact sheet from loans.org . The states that currently have laws prohibiting payday lenders from operating include Arkansas, Arizona, Connecticut, Georgia, Mary...
Read more

Phantom Debt Collection Scams on the Rise in Illinois

Have you been contacted by a person claiming to be a debt collector who is seeking to recover a debt you allegedly owe? If so, you are not alone. According to a recent report from CBS Chicago , such parties claiming to be debt collectors are on the rise, and they are scamming Chicago-area residents. These alleged debt collectors are part of schemes known as “phantom debt collection scams,” since they involve the attempt to collect on a debt that the consumer does not actually owe. How can you avoid becoming a victim in a debt-collection scam ? What should you do if you have been targeted by a fake debt collector? How Do Phantom Debt Collection Scams Work? Now, you might be thinking to yourself: I would never agree to make payment on a debt that I did not owe. But the scam is not always that simple. Parties at the center of debt-collection scams often target consumers who do actually owe debts (to someone or to some entity), and they prey on the fact that these c...
Read more

New Information on Debts That Bankruptcy Cannot Discharge

If you are thinking about filing for bankruptcy in the Oak Park area, it is important to know that certain kinds of debts cannot be discharged in a bankruptcy case. Under U.S. bankruptcy law, these are known as non-dischargeable debts, or exceptions to discharge. There are certain types of debts that have long been identified clearly as non-dischargeable debts, while there are misconceptions about other types of debts that may or may not be dischargeable. As an article in CNBC discusses, the U.S. Supreme Court recently issued a ruling in the case of Bartenwerfer v. Buckley , which clarifies that debts incurred due to another party’s fraud cannot be discharged in an individual’s bankruptcy case. Our Oak Park bankruptcy attorneys can explain the Court’s recent ruling and provide you with additional information on dischargeable and non-dischargeable debts. Supreme Court Says Debt Incurred Due to Another’s Fraud is Non-Dischargeable The recent Bartenwerfer case involved a debtor attempti...
Read more