Via Calculated Risk, BK Judge Rules Stated Income HELOC Debt Dischargeable, news of a decisions that does indeed seem likely to be important if followed — and also seems reasonable enough to be followed:
This is a big deal, and will no doubt strike real fear in the hearts of stated-income lenders everywhere. … Judge Leslie Tchaikovsky ruled that a National City HELOC that had been “foreclosed out” would be discharged in the debtors' Chapter 7 bankruptcy. Nat City had argued that the debt should be non-dischargeable because the debtors made material false representations (namely, lying about their income) on which Nat City relied when it made the loan. The court agreed that the debtors had in fact lied to the bank, but it held that the bank did not “reasonably rely” on the misrepresentations.
I argued some time ago that the whole point of stated income lending was to make the borrower the fall guy: the lender can make a dumb loan—knowing perfectly well that it is doing so—while shifting responsibility onto the borrower, who is the one “stating” the income and—in theory, at least—therefore liable for the misrepresentation. This is precisely where Judge Tchaikovsky has stepped in and said “no dice.” This is not one of those cases where the broker or lender seems to have done the lying without the borrower's knowledge
Lots more good stuff where that came from.