In a win for banks, the U.S.’s top court Monday ruled that underwater homeowners can’t get rid of a second mortgage by filing for bankruptcy protection.
All nine Supreme Court justices agreed that filing for chapter 7 bankruptcy protection doesn’t give homeowners the power to cancel a second mortgage when their properties aren’t even worth the value of the first mortgage.
The case involved two Florida homeowners who tried to cancel their second mortgages from Bank of America, arguing that because a second mortgage gets paid after the first, it is essentially worthless. Lenders, however, fought to keep the second mortgage liens, arguing that the debt could someday be fully paid once property values rise.
In Monday’s opinion, Justice Clarence Thomas said the court’s decision took into consideration “the constantly shifting” value of real estate.
“Sometimes a dollar’s difference will have a significant impact on bankruptcy proceedings,” he wrote in the nine-page decision.
Consumer advocates said the ruling will make it harder for bankrupt homeowners to get a fresh start.
“Some consumers may be forced to catch up on thousands of dollars of [payments] or lose their homes,” said Carol Colliersmith, an Atlanta bankruptcy lawyer.
Bank of America declined to comment Monday on the ruling. But the bank’s lawyers had argued that the dispute “may be the single most important unresolved issue in consumer bankruptcy.”
The 11th U.S. Circuit Court of Appeals upheld bankruptcy court decisions that stripped Bank of America of its liens. The bank appealed.
The dispute pitted homeowners, who saw property values plummet during the housing crisis, against mortgage lenders and their allies. Lending groups, including the Loan Syndications and Trading Association and American Bankers Association, backed Bank of America.
The AARP Inc. fought for loan cancellation, saying in a brief that it is “far more difficult for older people to bounce back from enormous financial setbacks” like bankruptcy or medical problems.”
Monday’s opinion clarifies the rules for bankruptcy judges who have disagreed on this issue. In 1992, Supreme Court justices determined that a bankrupt homeowner doesn’t have the power to cancel the lien on an underwater first mortgage, but it is less clear what power a bank with an underwater second mortgage has in bankruptcy.
Second mortgages were far less common at the time of the U.S. bankruptcy code’s last major overhaul in 1978.
Amid the confusion, some consumer experts argued that despite the sticking power of a lender’s lien after bankruptcy, bankruptcy should also give struggling homeowners a way to fix their housing-related financial problems.
read more: http://www.wsj.com/articles/supreme-court-underwater-homeowners-cant-void-second-mortgages-in-bankruptcy-1433173699
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