Bankruptcy and Divorce – Second Mortgages

It is an unfortunate fact that many divorces either involve or precipitate a bankruptcy.  All to often, the marital residence is security for a first and a second mortgage.  In a ruling by the United States Supreme Court, it is now not possible for the second mortgage to be canceled in a bankruptcy.

This does not mean that the homeowners will remain personally liable for the second mortgage, as it appears some news outlets seem to be implying.  Instead, it means that the lien against the home will remain in place such that if the home is sold the lien will remain in place or if the home is not sold the second mortgage payments must continue to be made.  The rule will primarily be applicable to those who go through a bankruptcy and intend to attempt to keep the home.  Under the ruling, after the bankruptcy is completed, the homeowner will still have to make the primary and secondary mortgage payments in order to avoid foreclosure.  In the event of a foreclosure, the first and second mortgages would both need to be paid off before the homeowner receives any funds.

The ruling does not seem to have any impact on the discharge of personal liability for any shortfall between the sales price of the home and the amount due for the first and second mortgage.  For purposes of divorce law, as there is no personal liability, there is no debt to divide in the divorce and minimal concern about subsequent liability of either spouse which may be characterized as non-dischargable property division for bankruptcy purposes.