For many Florida homeowners, years of financial difficulties have led to a scenario in which debt relief is imperative. For those who have taken out a second mortgage on their home, it is possible that the property is now worth less than the total amount owed. Many homeowners would like to address second mortgage debt within Chapter 7 bankruptcy, but a recent U.S. Supreme Court ruling has eliminated that possibility. For now, Chapter 13 bankruptcy remains the best bet for individuals in this set of financial circumstances.
The case before the Supreme Court looked specifically at whether a second mortgage on an underwater home should be considered to be a secured loan. Secured lines of credit are those that are backed by something of value that the lender could seize, such as a piece of real estate or a vehicle. A second mortgage on a home with less value than the amount of the loan can be argued to be unsecured, because there is nothing of value for the lender to claim in the event of default.
The Court ruled that due to prior rulings that set a precedent in the matter, homeowners seeking discharge of second mortgages within Chapter 7 bankruptcy would be unable to achieve that goal. However, an earlier ruling stated that these types of loans could be discharged through Chapter 13. This gives homeowners a viable bankruptcy option that can lead to the elimination of a second mortgage, while also allowing them to retain their home.
Chapter 13 bankruptcy is a good fit for many Florida consumers. It is often thought of as debt restructuring rather than the total discharge of debt. While Chapter 13 will not lead to the level of debt discharge that Chapter 7 offers, it does give borrowers the chance to gain control over their debt and retain their assets. For many, this makes it a far more desirable option.
Source: Forbes, “Debtors Can’t Void Underwater Mortgages In Bankruptcy, Supreme Court Rules“, Daniel Fisher, June 1, 2015