In a decision made on Monday by the nation’s highest court, chapter 7 bankruptcy rules have been clarified regarding the inclusion of second mortgages in a debtor’s petition. The Supreme Court ruling (Docket number 13-1421), brought by Bank of America against two Florida homeowners, states that a second mortgage cannot be cancelled in a chapter 7 bankruptcy. The homeowners’ cases argued that since a second mortgage is paid off before the primary mortgage, and that their properties are not worth the value of the primary mortgage amount, that the second mortgage is then valueless.
The two homeowners at the center of the case had each had their second mortgages from Bank of America cancelled in the 11th United States Circuit Court of Appeals. Bank of America appealed the decision and the case found its way to the Supreme Court where the determination was made.
The effects from Monday’s ruling will certainly be seen all over the country as homeowners, looking for financial relief, turn toward chapter 7 as a way to get them back on their financial feet.
Last year, more than 700,000 individuals and couples filed for chapter 7 bankruptcy, the most popular type of consumer bankruptcy, which enables a court-appointed trustee to sell a person’s property to repay debts and then cancel the rest.
About 2.1 million underwater homeowners had second liens at the end of the second quarter of 2014, said lawyers for Bank of America, citing a CoreLogic report. (Katy Stech, The Wall Street Journal)
Monday’s ruling further clarifies a 1992 ruling from the Supreme Court regarding first mortgages that are “underwater”. The 1992 determination stated that bankrupt homeowners cannot have the lien cancelled under chapter 7 bankruptcy but did not address second mortgages. The last major bankruptcy code overhaul took place in 1978 when second mortgages were much less common.
Source: The Wall Street Journal
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