The US Supreme court recently brought down one of its more surprising decisions. With a unanimous vote, the Supreme Court ruled that a second mortgage on an underwater home cannot be voided during bankruptcy.
In a 9-0 decision on the Bank of America, N.A. v. Caulkett case, the court says that borrowers whose homes are completely underwater – homes with a mortgage balance that exceeds the house’s current value – cannot just strip off a secondary lien when they file for bankruptcy under Chapter 7. Secondary liens are based on loans taken after the first mortgage and use a home as collateral.
This is contrary to the decision of the 11th Circuit Court of Appeals. The court then ruled that homeowners who filed for bankruptcy under Chapter 7 can strip off a second mortgage when the value owed to the holder of the first mortgage is greater than the present value of the property.
A case that was cited by the Supreme Court is the 1992 case Dewsnup v. Timm. Based on that decision, the court found that the lenders still have a secured claim “regardless of whether the value of that property would be sufficient to cover the claim.”
What is interesting is that according to Justice Clarence Thomas, the debtors have repeatedly insisted that they are not asking the court to overrule the Dewsnup decision. Instead, it looks like the debtors were looking for an exemption as the case involved a loan that was entirely unsecured.
What it means for Lenders
This is obviously a big win for mortgage lenders as it gives them a clearer path to recovering second lien from people who filed bankruptcy under Chapter 7. The decision rejects the idea that because the property’s value is currently less than the value of the claim, then the lien of the property is considered worthless. While the property right now has low value, it could change in the future and lenders would like to keep the bigger lien if the value does go up; with this decision, the lenders actually get the ability to foreclose on the property if its value increases.
What it means for the debtors
This is a big blow to the struggling homeowners whose properties are underwater. If you would look at it at the debtor’s perspective, you would like to end bankruptcy with a chance to restart life with as little property encumbered as possible; that is of course contrary to what the lenders want, which is to keep the bigger lien in case the value of the property goes up.
It’s not all bad news for underwater homeowners, however. Lien stripping is still available in Chapter 13 bankruptcies despite this latest Supreme Court decision. There are a number of benefits in filing Chapter 13 including a successful mortgage modification program that can also help you stop foreclosure proceedings on your home. Depending on your assets and income, a Chapter 13 can allow you to pay as little as $100.00 per month, while receiving a full discharge of your remaining debts at the conclusion of the plan. Additionally, Chapter 13 affords other benefits not available in Chapter 7: the ability to retain over-exempt assets; the ability to discharge certain debts not covered by Chapter 7; the ability to cram down a rental property to the value of the property; and even the ability to lower the interest rate on your vehicles.
The Supreme Court decision does change a lot of things but it does clear up the confusion about second liens. And as said, Chapter 13 remains as a viable option for filing for bankruptcy; but with any legal matters, it is best to consult with an expert bankruptcy lawyer for advice before proceeding.