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Second mortgages can't be canceled in Chapter 7 bankruptcy

Many people who file bankruptcy have mortgage payments. The ability to have these mortgages canceled during the bankruptcy process has been changed by a recent unanimous ruling by the United States Supreme Court. The ruling has to do with second mortgages for properties that are underwater.

In the ruling, the justices noted that homeowners can't expect to have second mortgages stripped off, even if the properties are worth less than the balance on the mortgage. This ruling comes in response to the homeowners who were struggling financially and tried to have the second mortgage stripped off through Chapter 7 bankruptcy filings in 2013.

Mortgages are considered secured debts since the home is held as collateral and can be sold if the debtor doesn't make the payments. When the mortgage balance is more than home is worth, it was argued that the debt was actually an unsecured debt since the home couldn't be sold to cover the balance, especially if there was a first mortgage that comes into play to reclaim the home and sell. If that had been the case, the second mortgage on a home could have been canceled as unsecured debt.

The justices' ruling came as a result of a precedent set in 1992. In that case, it was ruled that a secured claim was one that was "supported by a security interest in property" without regard to the value of the property compared to the amount of the claim.

With this ruling in mind, people who are considering a Chapter 7 bankruptcy filing should seek answers to help them determine if the ruling affects their case. This can help them to make an informed decision about filing for bankruptcy.

Source: The New York Times, "Justices Curb Bankruptcy Filers’ Ability to Have Second Mortgages Canceled," Michael Corkery, June 01, 2015

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Joshua Z. Goldblum, Attorney at Law
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