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Bankruptcy — mortgages

United States Court of Appeals For the Seventh Circuit


Bankruptcy — mortgages

A second mortgage cannot be stripped off in bankruptcy, even though the value of home is less than the first mortgage.

“Given the gross disparity between the current market value of the Palomars’ home and the claims secured by it, First American Bank is unlikely, to say the least, to foreclose in the immediate or near future. For that would entail the bank’s incurring legal expenses to obtain the ownership of property worth less than the first mortgage on the property; the bank would be compounding its loss. So all that failing to extinguish First American’s lien does from a practical standpoint is deprive the debtors of the chance to make some money should the value of their home ever exceed the balance on LBPS’s first mortgage. It is hard to see how the deprivation of so speculative a future opportunity could be thought to impair the debtors’ ability to make a fresh start. The extinction of the lien would not enable them to obtain a new second mortgage (unless from a predatory lender) or otherwise improve their financial situation.”


12-3492 Palomar v. First American Bank

Appeal from the United States District Court for the Northern District of Illinois, Feinerman, J., Posner, J.

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