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SCOTUS: Even valueless secured liens remain secured in Chapter 7

On Behalf of | Jun 9, 2015 | Firm News, Personal Bankruptcy

Challenged debtors and lenders alike were waiting for some time for the United States Supreme Court to render a definitive outcome in a case involving second (often termed “junior”) liens held on home mortgages.

The waiting ceased last week, when the nation’s highest judicial tribunal delivered a unanimous opinion described in a Forbes article as “a defeat for consumer advocates” and “a victory for lenders.”

Here was the question before the court: Is a second lien held by a junior mortgagee a secured lien that cannot be discharged in a bankruptcy even if its value is less than what can be recovered through sale of a home?

Bankruptcy filers were obviously hoping for a ruling that determined such liens dischargeable, that is, capable of being stripped away in cases of underwater mortgages, given that a mortgagee’s interest in an underwater property is zero.

As noted by Forbes, they were disappointed, with the court holding that a claim retains its secured status “regardless of whether it has any current value.” After all, an underwater property can conceivably gain in value over time, as has turned out to be the case in many instances in recent years as the country continues its claw back from the so-called Great Recession.

Thus, the bottom line, at least in a Chapter 7 bankruptcy filing involving a secured lien, is that the obligation remains secure even if it has no monetary value when the bankruptcy is commenced.

That outcome does not leave debtors without any hope whatever of removing such an obligation. To do so, however, they must seek to reorganize their debts through a Chapter 13 bankruptcy filing.

An experienced bankruptcy attorney can provide further information and help a debtor flesh out the key differences between Chapter 7 and Chapter 13 bankruptcy.

Source: Forbes, “Debtors can’t void underwater mortgages in bankruptcy, Supreme Court rules,” Daniel Fisher, June 1, 2015


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