Anyone who has been a homeowner in the last 10 years probably knows something about the housing crisis that we had in the middle of the last decade. For most of us, things have finally gotten somewhat back to normal.
Unfortunately, plenty of people are still left with houses that are underwater, especially when they have a second mortgage. And people who are facing bankruptcy often have an underwater home as one of their major debt problems.
Until recently, if your house was underwater you could file for bankruptcy, keep your house, and get rid of the second mortgage. But the Supreme Court just ruled that this is no longer an option when filing for Chapter 7 bankruptcy.
All of this stems from the issue of whether or not a second mortgage on a home with no equity is considered a secured debt. Bankruptcy typically eliminates all unsecured debt such as credit card debt or medical bills, but it does not eliminate secured debt such as a home or a vehicle because the lender has your asset as collateral.
A second mortgage on a home with no equity isn’t necessarily secured by anything. If the home has no equity, the holder of the second mortgage has nothing of value that he can pursue when the homeowner defaults on the debt.
This was the reasoning behind allowing a second mortgage to be eliminated when there was no equity to secure it. Unfortunately for debtors, the Supreme Court has just ruled that this lack of equity is not a sufficient reason for allowing debtors to get out from under their obligation to pay the second mortgage company.
This ruling is not surprising. Starting in 2005 when Joe Biden spearheaded changes to the bankruptcy laws that made it more difficult for debtors to qualify for bankruptcy, the federal government has shown a move towards favoring creditors over debtors in both federal lawmaking and judicial decisions.