Many homeowners in Maryland are faced with a difficult set of financial circumstances. Having financed the purchase of their home and during a period of solid financial stability, many took out second mortgages to cover the cost or home improvements, repair or other expenses. As the real estate market shifted over time, however, many of these borrowers now find that their home is worth less than the total amount owed on the property. It may be a relief to know that second mortgages are eligible for Chapter 13 discharge in such cases.
A recent case concerning the discharge of second mortgages during Chapter 7 bankruptcy recently went before the Supreme Court. The result was a ruling that such loans could not be eliminated during the discharge process because a second mortgage is considered to be “secured” by the property itself. That means that the lender has the right to seize the property if the borrower fails to make good on his or her obligations.
In the case of Chapter 13 bankruptcy, an earlier ruling found that a second mortgage on an underwater property is not “secured,” as there is nothing of value for the lender to seize. Therefore, second mortgages are eligible for discharge under Chapter 13 bankruptcy. This gives homeowners a viable option when seeking bankruptcy protection.
For those in Maryland who are facing serious financial troubles, this ruling may make the path ahead somewhat more clear. Because Chapter 7 bankruptcy will not lead to the elimination of a second mortgage, a Chapter 13 discharge of that loan may be the best available choice. Chapter 13 can also give borrowers the breathing room needed to regain financial stability and move forward, all while retaining their home.
Source: Forbes, “Debtors Can’t Void Underwater Mortgages In Bankruptcy, Supreme Court Rules”, Daniel Fisher, June 1, 2015