Rescission turns mortgage in to unsecured debt!
The borrowers were married but received only 2 copies of the Right to Cancel notice five days after signing the closing documents for a refinance of their primary residence. Upon completion of a Forensic Loan Audit and the discovery of “material disclosure violations” they rescinded the loan and filed for protection under chapter 13 of the bankruptcy code.
The lender refused to rescind the loan and the borrowers consequently filed an Adversary Proceeding in the Bankruptcy Court. The judge found in favor of the borrowers and determined that they had the right to rescind.
Since they had rescinded the loan, it was held by the court that the loan became an unsecured debt and the mortgage was automatically voided as per the TILA. Because the debt became “unsecured” it was able to be discharged through bankruptcy like any other type of unsecured debt such as a credit card debt.
