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Supreme Court to decide case on mortgages and personal bankruptcy

When the housing bubble burst six or seven years ago, many homeowners in Wisconsin were left with homes that were considered "underwater," meaning that the owners owed more on their mortgages than their houses were worth. While the economy has slowly improved since then, many homeowners are still in this position, and still struggling to figure out what to do about it. A case currently before the United States Supreme Court could further confuse matters.

The case, Bank of America v. Caulkett, concerns aspects of personal bankruptcy that are somewhat arcane and complex, but extremely important to many American homeowners who are struggling with financial hardship.

Specifically, the case deals with a homebuyer who purchased a home in 2006 with no money down. Using a so-called 80/20 deal, his purchase was financed with one mortgage paying for 80 percent of the price and 20 percent by a second mortgage. Unfortunately, once housing prices dropped, he ended up owing more than $183,000 on just the first mortgage while his home was valued at just $98,000. The second mortgage added more than $47,000 to his debt.

Under current rules, someone who files for Chapter 13 bankruptcy protection and completes the Chapter 13 repayment plan can have a second mortgage stripped off his or her total debt. However, in this case, the bank argued that doing so would violate existing law that bars bankruptcy courts from modifying home loans.

It's too early to say how the Supreme Court will rule on this case, but the impact could be important for many homeowners. This case shows how complex personal bankruptcy can be, especially when it is combined with other complex systems, such as the systems for mortgages and foreclosure.

It's important for Wisconsin residents who are struggling with debt to get help, and personal bankruptcy is one of the most powerful tools available for debt relief. However, because these matters can get very complicated very quickly, it's crucial for people to have experienced legal help when filing for bankruptcy.

Source: New Republic, "Why the Supreme Court Might Actually Rule Against the Corporate Interest," David Dayen, March 23, 2015

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