Consumers taking out a second mortgage will now have to consider the fact that if they encounter financial difficulties and file for bankruptcy, they won’t be able to strip off the additional loan obligation.
The Wall Street Journal reports that the Supreme Court ruled in favor of banks when it came to determining that struggling homeowners can’t get rid of a second mortgage using Chapter 7 bankruptcy protection, even if the home’s value is less than the amount owed on the first mortgage.
Monday’s unanimous ruling involved two cases in which Florida homeowners sought to cancel their second mortgages – issued by Bank of America – under the argument that when both primary and subsequent loans are underwater, the second is worthless.
The homeowners in the cases were previously allowed by lower courts to nullify the second mortgages. Back in 2013, those rulings were affirmed by the Atlanta-based 11th U.S. Circuit Court, the Associated Press reports.
However, Bank of America maintained that the rulings conflicted with Supreme Court precedent, arguing that even if the primary mortgage is underwater, it shouldn’t affect the lien securing the second loan.
According to the bank, there remains a possibility that the second loan would be repaid if the property’s value rose in the future.
The company also claimed that after the Circuit Court ruling, hundreds – if not thousands – of struggling homeowners had moved to nullify their second loans, the AP reports.
Justice Clarence Thomas said on Monday that the SCOTUS decision took into consideration the shifting nature of property, the WSJ reports.
“Sometimes a dollar’s difference will have a significant impact on bankruptcy proceedings,” he wrote in the decision.
Supreme Court: ‘Underwater’ Homeowners Can’t Void Second Mortgages in Bankruptcy [The Wall Street Journal]
Supreme Court says homeowners underwater on loans can’t void second mortgage in bankruptcy [The Associated Press]