In the bankruptcy case of Lewis, Kevin L. and Kathy A.; In re (Lewis v. State Street Bank), the bankruptcy court ruled that the value of a home was only what buyers were willing to pay for it despite what an appraiser may claim.
The details of the bankruptcy case:
The Chapter 13 bankruptcy debtors said their home was worth $85,000. They owed $69,534 on the first deed of trust, $16,981 on a second deed of trust, and $60,000 on a third deed of trust. The defendant held the second and third deeds of trust. The debtors’ confirmed bankruptcy plan indicated that they would challenge the secured status of the third deed of trust. In this adversary proceeding, the debtors alleged that the third deed of trust was wholly unsecured. As proof that their home was worth $85,000, they presented the testimony of the only person who expressed an interest in buying it when they placed it for sale. He said the property was not worth more because it needed repairs. The defendant presented the testimony of an appraiser, who said the home was worth $106,900. The appraiser conceded that needed repairs could affect the property’s value. The bankruptcy court found that the property was worth $85,000. Because the debts owed on the first and second deeds of trust exceeded the property’s value, the bankruptcy court ruled that the third deed of trust was unsecured.
This is an important ruling for homeowners filing Chapter 13 bankruptcy because currently home values are significantly depressed to the point that the amount of the mortgage is often more than they mortgage owed. However, as evidenced by rising property taxes and the mortgage industries unwillingness to modify the principal of upside down mortgages, the mortgage industry is not willing to concede that properties simply are not worth as much as they were sold for a few years ago. Fortunately for debtors, according to this bankruptcy case, if they are able to prove that people are not willing to pay above a certain amount, they may be able to reclassify 2nd and 3rd mortgages to unsecured loans. Secondary mortgages are reclassified as unsecured loans when the amount of the secondary mortgage is more than the home is worth.