Stated-income HELOCs ruled dischargeable in bankruptcy

This is a big deal.  A Bankruptcy Court has now held that a stated income HELOC (otherwise known as a “liar loan”) is dischargeable in bankruptcy by the homeowner/debtor.  The lender’s argument that the loan should not be discharged because it relied on the homeowner’s income statement and the (inflated) appraisal did not fly.  “In short, while the Court found that the Hills knowingly made false representations to the lender, the lender’s claim that it “reasonably relied” on these representations doesn’t hold water, because “stated income guidelines” are not reasonable things to rely on. In essence, the Court found, such lending guidelines boil down to what the regulators call “collateral dependent” loans, where the lender is relying on nothing, at the end of the day, except the value of the collateral, not the borrower’s ability or willingness to repay. If you make a “liar loan,” the Judge is saying here, then you cannot claim you were harmed by relying on lies. And if you rely on an inflated appraisal, that’s your lookout, not the borrower’s.”  http://calculatedrisk.blogspot.com/2008/05/bk-judge-rules-stated-income-heloc-debt.html