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Second mortgages troublesome arena for bankruptcy law

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Issues arising from the 2008 housing market collapse that swept through Ohio have taken bankruptcy law to the U.S. Supreme Court. In the oral arguments presented for Bank of America vs. Caulkett, the lawyer for the lender argued that the 11th Circuit Court of Appeals should not have allowed second mortgages to be discharged in a bankruptcy.

That court's decision had been based on the fact that the mortgages for Caulkett and another person exceeded the current value of the properties. It was impossible for the lender of the second mortgage to receive any money because the first mortgage could not be paid. Caulkett's property, when it was foreclosed upon, was valued at $98,000. The first mortgage was $183,000, and the second mortgage was $47,855.

Some associate justices indicated that they were concerned that bankruptcy settlements could be blocked by second mortgage holders that had no hope of collecting anything. One of these justices in particular was worried by this potential roadblock to bankruptcy because the process is supposed to give people a fresh start. When the Supreme Court makes its ruling, a new precedent regarding second mortgages in bankruptcy is possible.

Any person who is considering filing bankruptcy has many decisions to make. A consultation with an attorney could help the person select the type of bankruptcy that would provide optimal debt relief. Not all types of debts, such as student loans, can be discharged in bankruptcy. Sometimes, a person can protect their home from foreclosure. An attorney might be able to determine the best bankruptcy strategy for a person's individual situation.

Source: Forbes, "Second-Mortgage Case Has Justices Second-Guessing An Old Decision," Daniel Fisher, March 24, 2015

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