On Monday, June 1 the Supreme Court ruled that homeowners who file for bankruptcy will not be able to cancel their second mortgages if they owe more on the loans than their houses are worth. 

Bankruptcy no longer an option for stripping second mortgages
The case, Bank of America, N.A. v. Caulkett, pitted a homeowner who argued that because the second mortgage is paid off after the first, it is essentially useless, against the loan provider, Bank of America. When people file for bankruptcy they are typically allowed to cancel their unsecured debts, and when a house – the security on a mortgage – becomes less valuable than the home loan, the theory was that the debt had become unsecured, and thus eligible for termination. In 1992, the Supreme Court established the definition of a secured claim as one "supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim." Because of this precedent, a second mortgage remains secured, even if the home goes underwater. 

The American Bankers Association and the Loan Syndications and Trading Association had each supported this outcome. The two organizations noted that lenders for decades have relied on the precedent set by the 1992 case, Dewsnup v. Timm. They also observed that, had homeowners been allowed to cancel their second mortgages, it would be a detriment to the $40 billion in junior commercial loans still outstanding. 

Who this affects and what they can do
With the ruling, homeowners who file Chapter 7 bankruptcy will now have a tougher time canceling home equity loans and other variations of second mortgages. This ruling is good for lenders, but tough news for many homeowners. RealtyTrac found that, of the 1.3 million underwater homes in Florida alone, 23 percent had multiple mortgages taken out on them. There are still options for struggling homeowners who seek to cancel their second mortgages. Chapter 13 bankruptcy, for example, will allow them to strip their second mortgages, but that process is much more costly and can take a long time to complete. 

Still, Chapter 7 is the most popular type of consumer bankruptcy. About 2.1 million homeowners whose properties are underwater own second mortgages, and if any of them are struggling mightily to pay off those debts, the once-easiest option available to them has been taken away. Though options remain to strip second mortgages, the most popular one is now a thing of the past.