The United States Supreme Court is hearing oral arguments regarding whether it’s possible to discharge an underwater mortgage loan through Chapter 7 bankruptcy. Two homeowners with second mortgages owned homes worth less than what they owed on their first mortgages. The same lender possessed the junior-lien rights in both instances.
There have been conflicting rulings by courts on this issue. A prior Supreme Court decision ruled against homeowners facing an underwater second mortgage. However, a federal appellate court ruled in favor of homeowners in the current case, and that’s why this matter is now in front of the U.S. Supreme Court.
This case apparently will impact amounts that junior lien holders can recover when a declaration of personal bankruptcy takes place. Not surprisingly, many banks and lenders are opposed to any ruling that will be favorable to the homeowners and thus have filed “friend of the court” briefs in this matter.
However, the attorney for the lender in this case admits that the two homeowners are deeply underwater concerning their second liens. “That’s not true in every case, and there’s no reason to think it’s true in the typical case,” she added.
Bankruptcy attorneys will be watching this case closely. Many individuals filing for bankruptcy are in dire debt due to a loss of a job or illness. Forcing them to pay more than a home is worth only forces more individuals to default on the loan and throws the home into foreclosure.
Certain bankruptcy authorities feel a favorable ruling for the homeowners would actually be beneficial. Allowing homeowners to discharge a second mortgage containing no value helps these homeowners also hold onto their homes.
Source: Inman, “Underwater second mortgages surface in Supreme Court case,” Amy Swinderman, March 25, 2015