Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “What is Chapter 7 Bankruptcy?”
Bank of America has litigated its objection to the discharge of second mortgages in Chapter 7 bankruptcies all the way to the United States Supreme Court.
Banks loan money to people who then use the money to buy a home. In exchange, the borrowers agree to repay the money, and if they do not, their lenders can take possession of their home through a process called foreclosure. Some homeowners take out second mortgages. Many of these second mortgages are called “home equity lines of credit” and are reserved for borrowers whose home value exceeds existing or countenanced loan amounts.
Although lenders in second mortgages have the right to foreclose on properties if borrowers default, their rights are secondary to those of first-mortgage holders, meaning if borrowers go bankrupt, second mortgage lenders often lose their lien rights on a property.
In the run-up to the Great Recession, which officially ended in 2009, home values in states like Florida, New York, Nevada and California became inflated, and millions of borrowers undertook mortgage loan obligations that exceeded the value of their homes, once the housing market “corrected” and housing values began to tumble.
This left many borrowers “under water” on their mortgages, meaning that even if they sold their homes for full value, they would still owe money on their mortgages.