New York homeowners with second mortgages may want to know about a case being discussed by the Supreme Court regarding how bankruptcy should affect the status of “underwater” second mortgages. The case involves allegations that the current system, which is governed by the precedent established by a 1992 Supreme Court decision, allows the lien holders of second mortgages to prevent some borrowers who have declared bankruptcy from avoiding foreclosure.
The 1992 precedent set forth in Dewsnup v. Timm holds that bankruptcy courts cannot reduce the amount of a mortgage lien in cases where the property’s value was less than the amount owed to the lender. The debate over this decision was sparked by another recent ruling by the 11th Circuit Court of Appeals, which allowed two litigants to include a second mortgage as one of their discharged debts during a bankruptcy. The ruling affirmed a decision by a bankruptcy court to dispose of the debt on the grounds that the second lien would be virtually impossible to collect because the value of the property was even less than the first mortgage itself. The case compelled the justices to consider whether the same precedent was also applicable in cases with more than one underwater lien.
The proceedings raised the question of how to determine the actual value of a lien in situations where the property itself is worth less than what is owed. Some justices voiced dissatisfaction with the legal precedent established by Dewsnup v. Timm, particularly with its apparent failure to articulate the distinction between “underwater” and “partially-underwater” mortgages.
Homeowners with an underwater mortgage who are facing financial challenges, such as a loss of income or unpaid bills, have the option of filing for bankruptcy. An attorney can assist homeowners seeking debt relief through bankruptcy and may be able to stop home foreclosure by negotiating manageable payments with mortgage lenders.