The U.S. Supreme Court will decide whether homeowners can terminate “underwater” second mortgages during bankruptcy.
On Monday, the country’s top court agreed to review two appeals from Bank of America against bankrupt homeowners who are attempting to eliminate bank liens on their properties.
Two Florida homeowners are arguing that filing for Chapter 7 bankruptcy protection with a first mortgage valuing more than their property’s worth permits them to remove the lien from the second mortgage.
The homeowners’ lawyers argue that when both mortgage loans are underwater, the second lien is effectively valueless.
Financial lenders are fighting to keep the second mortgage lien, contending the debt could one day be fully paid—especially as property values increase.
“There is no such thing as a ‘truly valueless’ lien on property capable of appreciating,” as stated in court papers filed by Bank of America lawyers.
The 11th U.S. Circuit Court of Appeals ruled that homeowners currently in Chapter 7 bankruptcy can annul a second mortgage when the owed debt is greater than the value of the first mortgage.
Bank of America appealed the decision, stating their plea “may be the single most important unresolved issue in consumer bankruptcy.”
In 1992, the Supreme Court ruled a bankrupt homeowner does not have the authority to void a lien on a submerged first mortgage; however, the judgment is not clear as to the regulations on a second mortgage.
The last bankruptcy revamp occurred in 1978, when second mortgages were much less common.
Roughly 2.1 million debtors had partially or fully underwater second mortgages by the end of2014’s second quarter, according to a CoreLogic report.
A decision is expected June 2015.