On June 1, the Supreme Court ruled that junior mortgages could not be stripped during a Chapter 7 bankruptcy if the owner was underwater on the property. The ruling further clarified that this was the case so long as the loan was secured by the home and the claim was allowed under bankruptcy law. It is expected that this ruling will help mortgage lenders who are junior lien holders.
The case in question was Bank of America v. Caulkett, and the central legal question was how to treat the junior lien in bankruptcy court. Representatives for Bank of America argued that an earlier court ruling did not allow such a lien to be stripped in bankruptcy court. The plaintiff argued that the second lien should have been considered as an unsecured debt that would be disallowed in bankruptcy.
In the Supreme Court ruling, it was noted that the plaintiff needed to show that the debt is not an allowed secured debt. The plaintiff acknowledged that the debt was allowed while the court found that the debt was secured even if there was no monetary value to its claim. Therefore, the court found that ruling in favor of the debtor would create an odd precedent in future cases.
Debtors who are filing for Chapter 7 bankruptcy are generally able to get most of their unsecured debt discharged through such a proceeding. Even if certain debts are not eligible for discharge, a debtor may still obtain substantial debt relief by filing. Furthermore, such cases are generally resolved within weeks of the case being filed. An attorney may also be able to explain how much savings a debtor may realize and explain how filing for bankruptcy means at least a temporary reprieve from creditor harassment.