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Supreme Court will hear case on bankruptcy and underwater second mortgages

In 1992, the Supreme Court determined that homeowners whose first mortgage was underwater could not have their bank’s lien cancelled. This especially applied to people filing Chapter 7 bankruptcy. That ruling said that if someone had a mortgage on their home and the home was worth less than this mortgage, then the bank still owned the house (held a lien on it) and this lien could not be cancelled. Now, the issue at hand is a second mortgage according to a recent Wall Street Journal article.

A second mortgage is exactly what it sounds like. If a homeowner took out a second mortgage on their home, then it was usually in the form of a home equity line of credit. This line of credit was usually in cash. Borrowers were expected to pay back this mortgage, or else their lender, a bank, could take back the home through foreclosure or short sale, selling the home for less than what it is worth.

Second mortgages were by and large granted before the housing market crash. Once home prices fell, homeowners with a mortgage owed more than what their house was worth. In bankruptcy court, people were able to have their second mortgage cancelled in Chapter 7 bankruptcies. This would take the bank’s lien off the house, and thus the bank could not take back that house because the mortgage was cancelled by the courts.

Bank of America appealed this practice in two cases all the way to the Supreme Court. The bank does not want losses and bank industry lawyers will submit briefs to the Supreme Court in favor of the bankers. On the other hand, lawyers for the homeowners said that cancelling second mortgage liens in bankruptcy can “help unclog the housing market,” which is in a very slow recovery.

The law office of Jayson Lutzky, P.C. will be following this case as the result may affect what debts can be discharged in bankruptcy. If you are in financial distress, then you may wish to consider filing for bankruptcy to eliminate debts. Mr. Lutzky handles personal bankruptcy- cases and has over 31 years of legal experience. The lawyer offers free in-person consultations, so call 718-329-9500 to set up an appointment. Convenient Saturday appointments are available. Visit www.MyNewYorkCityLawyer.com to learn more about bankruptcy.

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