The housing collapse that undermined real estate markets across Minnesota has spawned some tough questions about bankruptcy law and underwater second mortgages. In Bank of America vs. Caulkett, the lawyer for the lender argued that a bankruptcy should not allow someone's second mortgage to be discharged even if the property's current value could not possibly recover any money for the lender.
Previously, the U.S. Court of Appeals for the 11th Circuit had allowed borrower and another person to cleanse their debts, including second mortgages, in bankruptcy. Their properties' values had plummeted below the money owed even on their first mortgages, so the court discharged the second mortgages in their bankruptcies.
Bank of America challenged the decision and sent the case to the U.S. Supreme Court. The lender's lawyer said that the precedent set in the 1992 Dewsnup v. Timm decision should apply to second mortgages. That decision had not allowed the debt of a first mortgage to be shrunk to the level of the current market value. Comments from the justices during oral arguments indicated that they felt dissatisfied with the precedent set in Dewsnup v. Timm and might consider overturning it.
Bankruptcy laws are intended to give people the legal tools to make a fresh start when overwhelmed by debts. They are also meant to sometimes provide lenders and lien holders with at least a partial payment when possible. An individual whose income cannot maintain their loan payments might consider Chapter 7 bankruptcy. An attorney could help a person decide if that form of bankruptcy would be appropriate. It could potentially allow someone to have credit card and consumer debts dismissed.
Source: Forbes, "Second-Mortgage Case Has Justices Second-Guessing An Old Decision," Daniel Fisher, March 24, 2015