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Supreme Court debating fate of 2nd mortgages

On Behalf of | Mar 30, 2015 | Bankruptcy

As many Virginia residents may know, a case before the U.S. Supreme Court focuses on whether a second mortgage holder may be able to hold up negotiations when a debtor is going through bankruptcy. In this case, the appellate court for the 11th Circuit held that the debtor could dispose of a second mortgage in bankruptcy. The holder of the mortgage, Bank of America, objected to that ruling.

The appellate court in the case said that the debtor was able to dispose of a second mortgage on a property that was worth less than the original loan. The second mortgage holders might not collect any monies if the home went to foreclosure but might be able to block a settlement that may eventually benefit debtors if the property appreciates in value.

The members of the court debated the use of any law that might make bankruptcy beneficial for debtors. The plaintiff’s attorney argued that while bankruptcy does allow debtors to start over, it is not intended to allow them to walk away from debt on their home yet keep the residence and receive additional benefit if house prices go up.

The court is evaluating whether a second mortgage on an underwater property should be disposed of by bankruptcy. Under current regulations, a second loan against the property might survive bankruptcy while the first loan might not. This, some of the justices agreed, may have disastrous results for a debtor.

If a debtor is in the position of losing his or her home, speaking with an attorney may be beneficial. The attorney may provide insight into whether bankruptcy might help. If that is the case, the attorney may provide guidance on how to file with the bankruptcy court.

Source: Forbes, “Second-Mortgage Case Has Justices Second-Guessing An Old Decision,” Daniel Fisher, March 24, 2015