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Bankrupt Homeowners Cannot Void Liens in Excess of the Value of Their Home

by Kevin Stine, Shareholder

Many times, homeowners are forced into bankruptcy because of dire financial conditions.  In the 1990’s and early 2000’s real estate values were constantly on the rise.  Many homeowners in financial difficulty used these rising values in their homes to obtain second, and even third mortgages to pay off credit cards and other debts.  Then, in the mid 2000’s the real estate values came crashing down to reality.  As a result, many homes became worth half of what they were two years before.

When mortgages came up for refinancing, many banks would not refinance them because the value of the home did not support the balance on the mortgages.  Many times, a homeowner would have a home worth $300,000, secured by a $150,000 first mortgage, a $50,000 second mortgage and a $50,000 third mortgage.  Then, suddenly, the same home became worth $180,000.  Obviously, the third mortgage would have no value to support it.  

In response, many homeowners filed bankruptcy, and attempted to “strip” the lien of the second and third mortgages, claiming that there was no value left in the home for them to be paid. Many banks argued that while there may not be value today, the value of the home may increase in the future, and the homeowner is not entitled to the increased value, but instead, it should go to the bank, since the bank has a valid lien on the home. This issue was finally decided by the US Supreme Court in June, 2015. 

The US Supreme Court determined that homeowners could not “strip” liens on their homes, just because there was no value to support the lien as of the date they filed bankruptcy.  Basically, the court determined that any future increase in the value of the home would go to the second mortgage holder and to the third mortgage holder, and not to the homeowner.  

Accordingly, a debtor cannot file a Chapter 7 Bankruptcy, and get rid of junior mortgages on his home, even if there is no value in the home to support to the junior mortgages.

Kevin Stine is a shareholder with MM&R who has 30 years of experience and focuses his practice in banking law, bankruptcy, real estate law, commercial litigation and civil litigation.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.

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