Bankruptcy Won’t Wipe Out 2nd Mortgages

The U.S. Supreme Court ruled this week that second mortgages on underwater homes cannot be voided during bankruptcy. The ruling involved a case in which two home owners in Florida had filed for Chapter 7 bankruptcy. Prior courts had ruled that the home owners in bankruptcy could void a second mortgage when the debt owed to the holder of the first mortgage is more than the home’s current value. As such, the lender would then lose its ability to foreclose on the property even if the value of the home increases.

Bank of America, which in this case was the second mortgage holder, argued that the prior court’s ruling was different than other appeals courts across the country.

The Supreme Court agreed, voting unanimously that home owners who declare bankruptcy cannot void their second mortgage obligations even if they’re home is underwater, meaning they owe more on it than it is currently worth.

Source: “U.S. Top Court Says 2nd Mortgages on ‘Underwater’ Homes Cannot Be Voided in Bankruptcy,” Reuters (June 1, 2015)