Real estate markets are unpredictable things: the property that an Arkansas resident buys one year may be worth far more or less in the years to come. While property values do tend to rise over time, the short-term value can be very volatile. In many cases, homeowners who took out second mortgages on their homes are now underwater on those debts, meaning that their home is worth less than the total amount owed. In such cases, Chapter 13 bankruptcy offers a viable solution.
A recent court case underscores the benefits of Chapter 13 over other options. The U.S. Supreme Court examined a case concerning the ability of borrowers to discharge a second mortgage during Chapter 7 bankruptcy when the property is underwater. The court ruled that because a second mortgage is "secured" by the lender's ability to seize the property in foreclosure, the loan cannot be discharged.
A previous decision, however, found that a second mortgage on an underwater home cannot be considered to be "secured," because there is nothing of value for the lender to seize. That ruling focused specifically on Chapter 13 bankruptcy. The end result is that homeowners who pursue a Chapter 7 filing cannot shed their second mortgages, while those who seek Chapter 13 can.
For Arkansas borrowers who are facing serious financial difficulties, the recent ruling may make the path ahead more clear. By filing Chapter 13 bankruptcy, a second mortgage can be discharged if a property is worth less than what is owed. In addition, Chapter 13 allows borrowers the change to restructure their debt and move beyond financial stress, all while retaining their home.
Source: Forbes, "Debtors Can't Void Underwater Mortgages In Bankruptcy, Supreme Court Rules", Daniel Fisher, June 1, 2015