Just this week, the Supreme Court heard oral arguments for a case regarding underwater mortgages and bankruptcy. In 2013, the Caulketts filed a Chapter 7 bankruptcy. During the bankruptcy proceedings they asked the court to discharge their second mortgage and the court agreed. Typically, individuals are only able to discharge underwater mortgage debt for Chapter 13 filings, so Bank of America is now bringing this case to the Supreme Court.
The decision in this case will have very big ramifications for bankruptcy law across the country. If the court decides in favor of the plaintiff, many people who are filing bankruptcy and feeling crushed under mortgage debt will have a new option. If the court decides for Bank of America, individuals filing for Chapter 7 bankruptcy will still have mortgage debt in most situations.
What is an Underwater Mortgage?
An underwater mortgage is a mortgage in which the debt far exceeds the value of the property. This can happen when individuals agree to predatory lending agreements or if the value of their home declines dramatically. Once someone has an underwater mortgage, he will have an incredibly hard time paying off the debt, because even the property itself is of lower value.
In the case of the Caulketts, they took out two mortgages to purchase a home in 2006. The first was for $183,000, and the second was for $47,855. After the real estate market collapsed, the Caulketts found themselves in serious financial trouble and had to file for bankruptcy. Unfortunately, the value of their home had declined precipitously, and now it was only worth $98,000—much lower than the amount of debt still owed on the mortgages.
Because they had an underwater mortgage, they asked the court to wipe out the second mortgage, and the court agreed. In bankruptcy law, those who file for Chapter 13 bankruptcy may ask for second mortgages to be wiped out if the first mortgage is worth more than the value of the property. This rule has not been used for Chapter 7 bankruptcies. Now it is being brought in front of the highest court in the land to decide.
What This Means for You
If you are filing Chapter 7 bankruptcy, this Supreme Court case might be extremely important. Other courts around the country are still reluctant to discharge underwater mortgages during a Chapter 7 filing. If the Supreme Court decides in favor of Bank of America, you will not be able to discharge these debts, and they will follow you even after bankruptcy. If the court decides in favor of the Caulketts, Chapter 7 bankruptcy may be able to give you the fresh financial start that you need.
If you are currently thinking about filing for bankruptcy, our attorneys can help you decide what type of filing you need and can help you through the filings and proceedings. Bankruptcy law is an incredibly complex area of law, but our practice has years of experience and expertise. Call us today, and we can schedule an appointment to meet with you soon.